Call rates ranged, rupee looks up, gilts ascend

RECAP

Call rates ruled in the 4.4-4.5 per cent range last week. According to dealers, though market players were able to raise funds in a low band of 4.20-25 per cent, towards the end of the day call rates firmed up.

Government bonds started the week with gains followed by liquidity-driven buying as the robust cash supply could not find any other deployment avenues.

The week saw the highest ever bids for repos exceeding Rs 50,000 crore per day. However, players, who adopted a cautious approach, registered gains ahead of the release of inflation data on Friday.

The key 10-year 7.37 per cent paper closed at around 5.21 per cent for the week and the yield fell by more than four-five basis points against the previous week.

"The liquidity situation continues to be the main factor driving the market and this is fuelled by banks which are receiving deposits on a large scale towards the year-end," said a dealer.

The trading in bonds was further aided by expectation that due to the base effect, the inflation rate will be benign. Foreign funds continued to pump in dollars who are infusing money in the buoyant Indian economy, especially at a time when the government's major disinvestment programmes are on.

The central bank is, on the other hand, absorbing these dollars to stem the rise in the rupee. The liquidity situation is further expected to surge with the redemption of the 12.50 per cent 2004 towards the end of the month.

Towards the end of the week, bond market volumes crossed Rs 6,000 crore with favourable inflation data and the reported postponement of the market stabilisation bonds by the government. The inflation rate came down to 5.32 per cent last week against 5.91 per cent in the previous week.

Similarly, the stabilisation bonds to be issued by the government will replace government securities to help the RBI to conduct open market operations. The rupee, on the other hand, continued to appreciate against dollar on the back of investments from abroad.

However, the spot rupee couldn't cross the 45.20 mark, as the demand for dollars continued from state-run banks on behalf of the central bank.

In fact, forex dealers are of the view that the RBI's intervention keeps a check on the rupee's rise against the dollar or else the rupee would jump by even five-seven paise per day, given the level of foreign fund flows.

In the following days, significant weakness of the euro and the pound, and the renewed strength in dollar seemed to weigh on the rupee.

However, much of the pressure was offset by the robust foreign fund inflows. Dollar sales by banks and exporters may be muted and may rather wait for RBI's stance on the rupee.

This acted as a knee-jerk reaction for banks and exporters who put on hold dollar sales and waited for concrete signs on the rupee's movement. Forwards remained range-bound even though there was slight dollar demand in the cash market.

The RBI was seen supplying dollars in the market for meeting the cash dollar demand of market players. Dealers feel that the cash dollar shortage is here to stay for some time and this will be a deterrent for a rise in forwards.

The rupee last week was also buoyed on robust supplies from exporters. Forward premiums ended the week slightly firmer due to demand from corporates in anticipation of further gains in the rupee in the near future.