Gilts look up, call rates in a groove, Re ends firm

RECAP

The interbank call rates market started in the 4.25-4.5 per cent range on last Monday amid ample liquidity in the system.

Government bond prices looked up last week as the anticipated selling did not materialise and instead there was a buying demand in the market mainly from public sector banks.

However, volumes were thin with several traders on an extended weekend as Tuesday was a holiday. The benchmark 10-year 7.37 per cent 2014 paper ended on Friday around last week's closing level of 5.2559 per cent.

The market sentiment has been bearish due to high inflation. Signals of an economic recovery have increased the chances of firming up of interest rates after a three-year-long monetary easing cycle and surplus money conditions.

It could be mentioned that the 10-year yield has moved up by more than 30 basis points from a historic low hit last October. The sentiment has become so dull that money market dealers have discounted any new rate cut in the new fiscal.

After experiencing a downward movement in interest rates for almost a decade, bond dealers feel that the rates have bottomed down and signals of a global rise in the base rates of various developed economies have surfaced.

Dealers feel that chances of a rate cut look grim as the liquidity is enough and the country will be in the midst of an election when monetary policy for the year 2004-05 will be announced.

The rupee, on the other hand, started with a gain against the dollar on Monday following a bunching of dollar inflows after the weekend.

However, despite the robust inflows, the rupee's gain was limited due to dollar buying by state banks as part of the RBI's intervention.

The trade deficit data released last week had no impact on the sentiment on the rupee as the figures showed that while imports for April-January rose by 24.7 per cent, exports looked up by 12.83 per cent.

Forward premiums ended softer in thin trades on Monday on receiving interest from exporters. Near-month forwards softened on customer sale of forward dollars.

During the week, the scene changed a bit as dollar strength overseas pushed down the gains in the rupee. Forward premiums continued to rule soft despite comfortable cash dollar supplies as oil companies bought spot dollars for payments.

Reacting to the loss in rupee, dealers felt that the rupee was long due for a correction and said that the rupee's dip was expected as the unit is now slightly overvalued on a trade-weighted basis.

However, there is an optimistic feeling that the rupee may be supported on persistent dollar inflows from companies that have raised loans overseas through the external commercial borrowing route. Forward premiums continued to soften on expectation of continued selling of forward dollars by exporters.

Fears of a cash dollar shortage due to strong intervention by the RBI in the spot market is also likely to keep forwards lower. Towards the end of the week the US dollar remained steady against major currencies after hitting three-month highs against the euro.

However, the week ended with the rupee ending firmer against the dollar as demand from importers subsidised.

The rupee had slipped earlier on demand from importers of defence equipment and state-run oil companies. Also, there had been persistent inflows from corporates which had raised foreign currency loans and this resulted in the rupee's rise.

Forward premiums nudged higher as demand for forward dollars from state-owned banks improved dollar liquidity.