Govt paper prices fall, overnight rates rise

MONEY MARKET ROUND-UP

The money and government securities market reeled under bearish sentiments following concerns on the state of liquidity in the market next week.

The concern follows the CRR hike by 50 basis points from 6.5 per cent to 7 per cent with effect from August 4. Similarly, The RBI has also removed the ceiling imposed on the amount to be absorbed under reverse repo mechanism.

While the market is witnessing an outflow of Rs 19,000 crore through auction of t-bills and dated securities this week, another RS 16,000 crore is slated to move out from the system after the CRR hike.

CRR is the cash maintained by the banks with the RBI against the deposits mobilised for which they do not earn any interest.

Moreover, since the RBI has removed the cap for reverse repo, banks will prefer to park the excess liquidity with the RBI since they earn 6 per cent interest for overnight , said bankers.

Therefore, concerns of tight liquidity from next week impacted the shorter end of the yield curve, wherein the yield on the 91-day treasury bill shot up by almost 200 basis points from 4.46 per cent last week to 6.48 per cent at the auction held on Wednesday. Similarly, the yield on the 364 day t-bill moved up to 7.25 per cent against a cut-off yield of 6.58 per cent last week.

"Even if the call money rates ruled around 0.10 per cent, it might inch up to 6 per cent on Friday when the market may start setting aside liquidity for CRR maintenance .

The government securities market witnessed prices falling by 35-40 paise in the benchmark 10-year segment and 15-20 paise in the shorter end of the maturity. However there was no change in longer dated securities.

The yield on the 10-year benchmark paper closed at 7.91 per cent against a closing of 7.85 per cent on Tuesday. Deals on the negotiated dealing segment of RBI amounted to only Rs 3000 crore .

The overnight swap rates also shot up on apprehensions of liquidity with the 5-year OIS rate closing at 7.54/7.56 per cent against 7.50 per cent on Tuesday.

While there were very few in the long term corporate bonds, the spread between the 10-year gilt and AAA paper of similar security widened to 150 basis points as against 140 bps earlier. Interest rates on the short term instruments have gone up with one-year certificate of deposit ( CD) and commercial paper (CP) fetching 8.5/8.6 per cent as against 7.80 per cent earlier.

Meanwhile , following the crashing of the equity market ( Sensex down by 651 points) , the spot rupee dollar exchange rate depreciated during the day to close at 40.47/48 after opening at 40.44/42 to a dollar and reaching an intraday low of 40.40.55 to a dollar.

However the spot rupee is expected to open firm on Thursday since most of the banks will be selling dollars to generate rupees and book dollars in the forward market so as to avoid rush from next week when liquidity is expected to firm up, said dealers.

Concern on liquidity pushed up the annualised premia for six month and one year forward dollars that closed at 1.82 per cent and 1.79 per cent as against1.57 per cent and 1.66 per cent on Tuesday . It is expected to firm up further, added dealers.

In the global markets, most major currencies recovered their earlier losses against dollar. One euro is ruling at $1.3676 against 1.3710, while GBP is at $2.0292 per GBP against 2.0338.Similarly, yen is at $118.62.