Liquidity overhang, but RBI unlikely to intervene

Outlook : Money markets

 The lacklustre interest in the market is evident from the fact that an average of Rs 27,305 crore was invested in the repo market last week as banks and market players chose not to take any position.

 Interest in the market has waned since the credit policy announcement as the Reserve Bank of India (RBI) has failed to give any indication on where interest rates are headed.

 It might be recalled that the market had discounted a 25-50 basis point reduction in the repo rate, which did not materialise, leaving players nothing to look forward to.

 Government security prices have thus been falling, and volumes have remained low. Yields have tightened across the board. Yield on 10-year paper rose from a low of 4.95 per cent to the current 5.16 per cent, and is expected to go up further.

 Despite the liquidity overhang, the RBI is unlikely to come out with any open market operations (OMO) as this could worsen the situation.

 The apex bank will have to offer a lower cut off yield to suck out the excess liquidity. What