Low borrowing plan lifts gilts, forex mart bearish

RECAP

The government securities market perked up last week with the Centre reducing its borrowing target to Rs 44,000 crore for the second half of the current fiscal.

"The sentiment turned bullish after the government announcement a lower borrowing target. The market was expecting a borrowing target of Rs 60,000-70,000 crore," a dealer said.

A senior government official said the lower borrowing was because of state debt swap receipts. The yield on the benchmark 10-year, 7.37 per cent 2014 paper touched a low of 6.06 per cent and a high of 6.16 per cent during the week.

In the beginning of the week, in anticipation of the government's borrowing programme, gilt prices across maturities remained flat.

However, by the end of the week prices rallied on the back of positive reports on interest rates and market stabilisation bonds.

According to dealers, the prime minister has reportedly stated that a hike in interest rates is no solution to control inflation. Also, in a statement to the media, finance ministry officials announced plans to hold back market stabilisation bonds for the time being, said dealers.

Long-term gilts went up by Rs 1.20-1.30 during the week, while short and medium term papers moved up by 32-40 paise.

Gilt prices edged up on Friday to their highest in two weeks after data showed inflation rose at a slower-than-expected pace at 7.87 per cent and bolstered expectations that interest rates would remain stable at three-decade lows.

A senior government official said the government was committed to holding prices and will take more fiscal measures, if needed, to curb inflation. Outflows towards the advance tax payment and cash reserve ratio pushed up call rates to around 4.5 per cent for most part of last week.

Call rate is the interest rate at which banks borrow and lend for their day today operations.

The US Federal Reserve governor's announcement that the Fed will not hike interest rate hikes for the time being till clear signals of economic recovery emerge also influenced the sentiment.

Seeking good value in terms of earning yield differential, primary dealers heavily traded in illiquid papers. Dealers said there is not much value in traded papers. Illiquid papers like the 12.32 per cent 2011, 11.83 per cent 2015, 11.45 per cent 2015, 9.85 per cent 2012 and 11.15 per cent 2011 have emerged as the top traded papers.

"The heavy trades are among few primary dealers who are ramping up prices chasing value from illiquid papers," said a bank dealer.

The foreign exchange market remained bearish last week with oil prices going up from $43-44 per barrel to $48 per barrel. The spot rupee opened on Friday at 45.90/91 but slipped to a low of 45.9450, before closing at 45.91/92 per dollar.

Forward premiums remained range-bound with activity mainly remaining confined to the spot market. The annualised premium on the six-month and one-year forward dollars closed on Friday at 1.82 per cent and 1.56 per cent, respectively.

The were no factors to give direction to the market, which is causing exporters and importers to take advantage of every favourable move, said a trader at a state-run bank. They said the near-term outlook for the rupee was mixed.

On the one hand there were pressures from the high price of oil and high inflation. But the market was expecting currency inflows from both portfolio investors ahead of the October earnings season and overseas debt issues by Indian companies stepping up investments.