Surplus liquidity inspite of outflow

MONEY MARKET ROUND-UP

Money: Healthy state
The market witnessed surplus liquidity inspite of an outflow of around Rs 30,000 crore last week.

According to market dealers, the actual outflow from the market has been the dated securities issued under market stabilisation scheme and government borrowing. The t-bills under MSS are rolled over and thus do not form a part of actual outflows.

The Reserve Bank of India absorbed around Rs 46,000 crore from the market under reverse repo. Dealers are of the view that after the outflow of around Rs 10,000 crore under MSS, there will be some concern on liquidity.

This is because, along with issuance of bills and bonds under MSS, the RBI is entering into sell buy swaps in the foreign exchange market to suck out excess liquidity.

Call rates closed at 6.35 per cent after touching an intraday low of 3.75 per cent due to abundant liquidity in the system.

G-sec: Lacklustre trading
The market remained dull and lacklustre accompanied with low trading interest. "The increased issuance of bonds and t-bills have heightened the concern on liquidity, affecting the trading interest. Banks are thus selling bonds to participate in the forthcoming auction", said a dealer.

The short-term nature of the bonds affected participation in the auction. Prices of government papers moved down by 5-6 paise across maturities and the yield on the benchmark ten year paper closed at 7.90 per cent. The yield on the 364 day t-bills ranged in a band of 7.27-7.40 per cent. There were very few trades in the market.

OIS and corporate bonds: Thin trading interest
The interest rate uncertainty led to thin trading in the overnight interest rate swap market. Overnight interest rate swap market is derivative product based on the underlying of the interest rate on the government securities.

While the banks are slashing interest rates, the RBI seems to giving a different signal by absorbing liquidity from the system and pushing up the interest rates, according to a dealer. The interest rates in the benchmark maturity of one year and five year remained flat at 6.97 per cent and 7.25 per cent respectively.

Contrary to the government securities, the corporate bond market is witnessing brisk trading interest, especially from banks and mutual funds.

Mutual funds are flush with cash as banks have subscribed to their liquidity schemes. However, there is not much interest in government bonds due to the flat yield curve, leading to trades in corporate bonds for interest rate differential.

In the long term bond market, five year bond of Power Finance Corporation and 10-year upper tier II bonds of State Bank of India were traded at 9.35 per cent and 9.67 per cent as against 9.41 per cent and 9.70 per cent respectively last week.

In the secondary market, Canara Bank raised funds at 8.30 per cent for one year through certificate of deposits, while State Bank of Patiala mobilised money through nine month CD at 8.07 per cent.

Rupee: On a high
Foreign exchange inflows continued following the buoyant equity market. The Sensex closed 600 points up and crossed 19000 points to close at 19095.

However, intervention by the RBI through sell buy swaps checked the rupee dollar exchange rate. The RBI will buy dollars from the market and sell them on the same day.

While selling these dollars back, it will book a contract with the buyers to buy the dollars back at a specified price on a future date (basically a forward contract).

The spot rupee opened at 39.35/36, but closed at a high of 39.31/32 to a dollar. It could have closed up further, but for the RBI intervention, said a dealer.

Backed by the sell-buy swaps in the forward market, the premia in the forward market are going up. Since the RBI is selling dollars in the forward market and simultaneously entering into contracts to buy them back at a forward date, this involves payment of premia in terms of rupee.

Thus, the forward premia has gone up. The annualised premia for six month and one year forward dollars have gone up to1.89 per cent and 1.51 per cent as against 1.82 per cent and 1.39 per cent respectively.

International markets: Both euro and GBP gained against the dollar by ruling around 1.4225 and 2.0406. Yen ruled at $117.70.