Call rates may stay higher, Re seen holding strong

Call money rates rose to close the week at 7-7.2% from 4-4.25%. Call rates reflected tight cash conditions mainly due to the impact of outflows towards advance tax payments. Call rates moved in a range of 6-8.5%. At the end of the week, the LAF auction trend suggested that the surplus cash had dried up from the system. A bid worth Rs 1,200 crore was received and accepted at the repo auction, whereas no bid was received for reverse repo.

The cumulative CBLO volumes for the week rose to Rs 1,71,218 crore from Rs 1,63,493 crore. The overnight weighted average yield was higher at 6.1750% against 5.6427% in the previous week.

Call rates could stay higher for a major part of this week with fresh auctions lined up. Conditions could ease only gradually with the help of investment inflows, and later, government spending.

Gilts Market

After opening on a steady note, the US Federal Reverse decision to cut a hefty 50 bps from its key interest rates triggered a rally in the local gilts market.

As a knee-jerk reaction to the announcement faded, yields steadied by the week end. Shrinking liquidity and crude oil prices kept a tab on sentiment. Benchmark 7.99% GOI 2017 bond yield fell to near multi-month low to 7.78% from 7.86% before stabilising at 7.82%.

Treasury bill and bond auctions would keep liquidity under pressure and rule out extended gains in bonds. Traders had hoped that FII inflows and the government spending would alleviate pressure on liquidity in the coming week or so.

Corporate Bonds

The dull corporate bond market sentiment was boosted by the FOMC monetary policy. Recently issued papers garnered maximum attention and yields eased despite higher oil and tight cash.

After some big issues of good papers, the primary market was relatively dull. Issuers opted to hold their plans as advance tax outflows had dried liquidity in the system and also hoping that drop in US yields would rub off on local yields.

Fed policy prompted sharp easing of AAA 5-year benchmark yield which slipped by almost 20 bps to 9.55% from 9.73%, while spreads over comparable GOI paper narrowed to 172 bps from 189 bps.Liquidity is likely to remain the scourge of the market, which looked good for an extended run of better activity with a couple of papers queued up to hit the secondary market.