Rupee rise curbed, call flat, gilt yields edge up

RECAP

Interbank call money rates ended little changed at 4.30-4.50 per cent last week 4.25/4.50 per cent on Monday.

Yields on central government bonds inched up as concerns about inflation kept trading interest subdued.

Inflation has risen for eight straight weeks to 6.09 per cent up to January 3.

The Reserve Bank of India, however, expects the headline numbers to ease to 4.0-4.5 per cent by the end of the fiscal year in March. But traders are concerned that there are no signs yet of that happening.

Traders said sentiment was little impacted by news that the RBI was able to fully sell loans of 13 out of 27 state governments currently in the market.

The central bank is selling loans worth a total Rs 8,000 crore of which Rs 6,000 crore will be used to retire debt borrowed from the Centre.

In the subsequent sessions, while call rates continued to display a steady-to-easy trend for most of the session on the back of ample liquidity, government security prices showed a mild downward bias amidst sustained light selling.

Most of the bonds were quiet owing to low-key activity, but select gilts at the short-to-medium-term ended 6-12 paise down on persistent selling.

This is because players groped to gain a sense of direction on interest rates. Yields on the benchmark 7.37 per cent 2014 paper ended unchanged at 5.13 per cent.

Call rates ended mildly higher on Wednesday owing to a slight strain in liquidity due to the state loan auction outflows.

On reporting Friday, call rates ended at 4.40-4.55 per cent, as banks rushed to cover for their reserve products and major lenders reluctant to offer funds anticipating a slight strain in liquidity due to the state loan auction outflows.

Outflows on account of the Reserve Bank of India 's on-tap sale of the 5.90 per cent state loans caused a temporary mismatch in demand/supply, but there was adequate liquidity in the system to counter the deficit.

The boost to the market came last week in the form of Moody's upgrade but expectations of inflation rates weighed on bond prices, paring sharp gains.

Moody's on Thursday upgraded India's rating on foreign currency bonds and the government's foreign currency issuer ratings to BAA3 from BA1, and said the outlook for both the ratings were stable.

The spot rupee ended stronger against the dollar as dollar demand waned and inflows continued. Sentiment was also buoyed after the government gave automatic approval to companies for external commercial borrowings up to $500 million for over 5-year maturity.

Though there is renewed optimism on the dollar's rise across the globe, upbeat local sentiment, steady inflows and the rupee's undervaluation on trade weighted basis may augur well for the local currency.

Forward premiums ended sharply higher as banks continued with their sell spot-buy forward swaps on the view that the cash dollar shortage seems to have subsided for now.

In fact, forward premiums throughout last week opened higher as banks reversed their sold forward dollar positions.

The rupee ended a tad firmer against the dollar in lackluster trade, amid this supplies and insipid demand. On Friday, the spot rupee breached the 45.35 level and there were stray deals reported in the 45.3425 level range during the second half of the trading session.

Dealers said the rupee could have strengthened further if the central bank had not intervened.