Cash clog to keep gilt prices up
The Reserve Bank of India's (RBI) attempt to hold government security yields at current levels through its Rs 6,000 crore open market operation (OMO) on Saturday may come a cropper as a funds-flush banking system is set to gun for gilts, lifting their prices.
With no major outflows scheduled for this week, there could well be an aggregate fund flow in excess of Rs 30,000 crore.
About Rs 11,000 crore came into the system on Saturday by way of redemption of government papers. The three-day repo that sucked out Rs 16,000 crore will come again into the system on Monday further giving a boost to market liquidity.
Dealers said there is a real liquidity of at least Rs 12,000 crore on a daily basis marked by the flows into the repo market. This level of liquidity is expected to increase next week with Rs 7,800 crore coming in by way of the 14-day repo conducted on September 9.
The Rs 6,000-crore OMO on Saturday will result in funds leaving the system on Monday, but with little impact on liquidity.
Market dealers expect the rally in prices to continue. They feel that the prices of medium-term papers will go up by 40-50 paise and those of longer-term securities will rise by 60 paise to Re 1.
However, caution is expected to set in only on Saturday in anticipation of the forthcoming auction of government paper in the following week.
More fund flows from the forex arena
The inflows will be further enhanced following greater conversion of the dollar as the rupee has been strengthening against the greenback.
The RBI calendar schedules an inflow of Rs 750 crore by way of a 364-day treasury bill coming up for redemption on Friday, against an outflow of Rs 1,000 crore in terms of 91-day and 364-day treasury bill auctions on Wednesday.
However, there is already ample liquidity in the market without the need for more inflows.
Call money rates stuck at repo levels
Call money rates have been stuck at repo levels for weeks because of the liquidity overhang. Even as the market anticipates a cut in the repo rate, analysts feel that it will add to the liquidity overhang and will see the yields fall further.
The liquidity in short-term papers has fallen sharply, since the shift in the borrowing programme towards the longer end has seen few fresh issues in the short end.
And also, there is little interest in short-term paper, as the differential between the call money rates, at 5.70-75, varies little against the low yield of 6.5 per cent on 2007 papers: the 50-70 paise arbitrage opportunity does not encourage players to pick up this paper.
The market has already rallied sharply last week bringing the benchmark 10-year paper to a historical low yield of 7.10 per cent.
The market expects the yields to fall further by 10 basis points to 7.05 per cent in this week. Analyst said a repo cut could take the yields to as low as 6.8 per cent.
Demand for 364-day bill will rise
The lack of liquid short-term paper has heightened the demand for 364-day treasury bills.
The upcoming Rs 750-crore auction of this paper is expected to see the cut-off yield fall below 5.9 per cent, as the market bids for a lower cut-off. The previous cut-off on 364-day bill has fallen from 6.01 per cent to 5.99 per cent already in the past few weeks.
The yields on 91-day bill are expected to remain at current levels of 5.8 per cent, as they cannot fall below call rates, which in turn are hampered from a fall by the current repo rates. Again the market sentiment seems to drive the need for a cut in the repo rate as yields at the shorter end are ranged, spurred by the rigidities in the system.
Following the redemption of 11.15 per cent 2002 paper on last Saturday, demand is expected for short-term paper, which will see the demand pick up for the coming 364-day bill auction.
