Gilts subdued, forwards in discount zone, call cool

RECAP

The government securities market and the foreign exchange market ended last week on a subdued note. The Yield on the benchmark 10-year paper closed a tad higher at 5.08 per cent against 5.06 per cent in the previous week.

The rupee breached the 44 per dollar level last week. On the last trading day of last week, it ended at 44.02 amid acute cash-dollar shortage.

However, late exporter dollar sales and offloading of huge dollar positions by banks ahead of the long weekend capped the rupee's losses. The currency had hit a intra-week low of 44.22 per dollar.

The forward dollar sunk deeper into discount territory as traders covered their short dollar positions through buy-sell swaps. Dollar buying by state-owned banks and abrupt dollar gains overseas pushed the forwards into the discount zone.

In the bond mart the undercurrent was subdued on uncertain interest rate outlook. The Reserve Bank of India (RBI) deputy governor Rakesh Mohan's comments hinting on a possible rate hike and rise in inflation dampened sentiment further. The RBI is slated to present its monetary policy on May 18.

Upbeat comments by the US Federal Reserve chairman Alan Greenspan on the US economy sent jitters and indicated a possible hardening of interest rates. The Indian inflation rate, which remained unchanged at 4.40 per cent last week, could not spur fresh buying interest in gilts.

The RBI conducted on-tap sale of state loan through the 5.60 percent 2014 paper, which was oversubscribed. The apex bank mopped up Rs 6,500 crore through this sale.

The RBI at its at its 91-day treasury bill auction set a cut-off yield of 4.38 per cent against 4.42 percent in the previous week. The low cut-off yield failed to trigger buying in the market.

Trading interest was largely centered in the longer tenor papers. State-owned banks and insurance companies were active players in the longer end of yield curve. Total volumes stood around Rs 6,000 crore. Surplus liquidity in the system capped any major losses in prices.

The central bank will conduct an auction of treasury bills worth Rs 4,000 crore, including Rs 2,500 crore under the market stabilisation scheme (MSS) on April 28.

It will conduct the auction of 91-day bills for a notified amount of Rs 2,000 crore, including Rs 1,500 crore under MSS, as also of 364-day bills for Rs 2,000 crore with an MSS component of Rs 1,000 crore.

In addition to this, the RBI will also auction the 6.18 per cent 2005 paper worth Rs 5,000 crore on April 27 using the price-based method.

Meanwhile, interbank call rates traded easy at sub repo levels with not much demand for liquidity. The rates hovered in the range of 3.50 to 4.50 per cent last week, with stray deals being struck at 3.00 per cent.

Mutual funds were the major lenders last week. Extensive bidding at the repo counter underscored the ample liquidity in the banking system. Over the past few weeks, repo volumes have been rising "" the volume fo the seven-day repo is in the range of about Rs 20,000 to Rs 27,000 crore.

In the absence of fresh triggers the corporate bond market remained subdued during last week. The AAA benchmark five-year yield rose by six basis points during the week to 5.53 per cent, while the spread widened by 5 bps to 78 bps.

The debt market will remain closed on Monday, April 26, for the second phase of Lok Sabha polls.

Meanwhile, India's foreign exchange reserves continued their upward swing, crossing the $117 billion mark due to inflows of $1.53 billion during the week ended April 16.

In the previous week ended April nine, forex reserves had swelled by a whopping $3.37 billion, boosted by inflows in public offerings of state-owned undertakings, including ONGC.

Foreign currency assets for the week ended April 16 surged by $1.543 billion to $112.103 billion.