Call money rate past six per cent; 10-year yield touches three-month high.
After remaining “surplus” for three days last week, the financial system on Monday moved back to the “deficit” mode as the Reserve Bank of India (RBI) net infused Rs 16,415 crore into the system.
Dealers said through resource conditions had improved, the surplus was largely on account of large redemptions of government bonds. The rise in credit demand from various sectors in the coming months will keep pressure on resources.
Banks parked Rs 2,520 crore at the reverse repo facility while RBI lent Rs 18,935 crore to banks at the repo window.
Last week, banks parked surplus funds with RBI on three consecutive days (July 28-30).
A A Badshah, general manager (treasury), Bank of India, said RBI would like the system to be in deficit to improve the transmission effect of the monetary policy. Plus, this would improve efficiency in use of funds.
RBI Governor D Subbarao, in conference call with analysts, had indicated that RBI expected systemic liquidity to be more in deficit than in surplus. He was explaining the reason for RBI’s decision to narrow the corridor of repo and reverse repo rates in its quarterly monetary policy review.
The interest rate in the interbank overnight lending market also inched up to between 5.25 per cent and 6.10 per cent for the most of trading day, according to an IDBI Gilts’ research note.
Signaling easing of pressure on resources, RBI last Friday discontinued the second liquidity adjustment facility being conducted daily since May 28, 2010. It, however, will continue to conduct the second LAF session on every reporting Friday.
RBI had begun second LAF in late May sensing building up of pressure on liquidity due to payments for spectrum fees and broadband wireless and payment of first installment of advance corporate tax.
10-year bond yields at 3-month high
Bonds fell on Monday, pushing the 10- year yield to a three-month high, as overnight borrowing rates in the local money market climbed and the government announced plans to step up short-term debt sales this week.
The benchmark 10-year bonds declined for a fifth day, the longest losing streak in two months, after the government said it would auction Rs 8,500 crore of treasury bills this week. That’s almost triple the Rs 3,000 crore of notes sold last week. The cost of borrowing funds overnight in the interbank market touched a four-week high of 6.05 per cent, deterring lenders from buying debt with borrowed funds.
The yield on the 7.8 per cent bond due in May 2020 rose six basis points, or 0.06 percentage point, to 7.86 per cent as of the 5:30 pm close in Mumbai, according to the central bank’s trading system. That’s the highest level since the notes began trading on May 3. The price fell 0.42 per cent, or 42 paise per Rs 100 rupee face amount, to Rs 99.55.
The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, rose to the highest since November 2008. The rate, a fixed payment made to receive floating rates, increased to 6.46 per cent from 6.37 per cent at the end of last week.
Bonds also fell as a report showed India’s manufacturing growth accelerated in July, increasing pressure on the central bank to add to the four interest-rate increases announced so far this year. The Reserve Bank of India (RBI) last raised its overnight borrowing rate July 27 by 0.5 percentage point to 4.5 per cent.
Re strengthens a third day
The rupee strengthened for a third day on optimism funds will add to record holdings of the nation’s assets to benefit from higher yields.
Overseas investors’ holdings of Indian equities climbed to $83 billion (Rs 3.84 lakh crore) on July 29, while their debt holdings are near a $15.4 billion (Rs 71,225 crore) peak touched on July 16, the Securities & Exchange Board of India said last week. Gross domestic product expanded 8.6 per cent in the first quarter of 2010, the third-fastest pace among major economies. India’s 10-year bond yields are now at 7.86 per cent, compared with 2.94 per cent for similar-maturity US treasuries.
“India is sustaining its strong economic trend, which isn’t something you can say about much of the rest of the world, and that’s drawing flows,” said Sudarshan Bhatt, chief currency trader in Mumbai at state-owned Corporation Bank. “Interest- rate premiums are helping too. The rupee will keep a positive bias.”
The rupee appreciated 0.3 per cent to 46.25 per dollar as of the 5 pm close in Mumbai. The currency earlier touched 46.11, its strongest level since June 28.
Offshore forward contracts indicated the rupee would trade at 46.83 to the dollar in three months, compared with expectations for a rate of 47.08 at the end of last week. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
The Reserve Bank of India (RBI) raised its overnight borrowing rate on July 27 for a fourth time this year to 4.5 per cent to curb inflation.
The rupee also advanced as a report showed manufacturing growth accelerated in July. The Purchasing Managers’ Index rose to 57.6 from 57.3 in June, HSBC Holdings Plc and Markit Economics said in an e-mailed statement on Monday. A reading above 50 indicates expansion.
