Call rates to remain steady, Re may stay flat

Call money rates ended the week at 4.50-5.00%, down from the previous week’s close of 6.00-6.10%. On the last day of the week, call rates dipped to 3.50-4.00% with banks having covered products comfortably. Earlier, call rates held steady around 6%, not affected by a series of auctions totalling Rs 24,500 crore.

The LAF window clearly reflected comfortable liquidity conditions. On Friday, RBI received and accepted 35 bids for Rs 36,545 crore for reverse repos while no bid was received for repos. The cumulative CBLO volumes for the week rose to Rs 182,011 crore from Rs 154,528 crore. The overnight-weighted average yield was lower at 5.3844% as against 5.8100% in the previous week. RBI announced T-bills and MSS bonds worth Rs 16,000 crore for this week.

Call rates are expected to remain steady backed by comfortable liquidity conditions. However, concerns hover over the medium-term scenario as they believe that continuous fresh supplies might caused liquidity to shrink.

Gilts market

Excess liquidity coupled with increased supply of GoI bonds kept trades range bound amid thin activity. Money market comfortably absorbed sale of risk free papers amounting to Rs 24,500 crore. Price cut-offs at the auctions were higher. Volumes sank to almost negligible as players eyed MSS and regular auctions with ample cash in hand.

Benchmark 7.99% GoI 2017 bond yield stuck in narrow range around 7.90% mark except for a temporary spike to 7.94% due to concerns over RBI’s liquidity soaking measures. Robust IP data coupled with benign inflation did not hurt sentiment as players have already discounted in prices. IP grew at 10.7% pa in August from 7.5% pa in July. Annual WPI eased to 3.26% y-o-y for the week ended September 29 from 3.42% y-o-y. Market activity is likely to be submissive with sideways movement in yields.

Corporate bonds

Corporate bond market sentiment was positively boosted by ample liquidity. Average daily volumes in the secondary segment continued to remain robust above Rs 500 crore. However, yields could not gain equally from the excess liquidity leading to range-bound trades.

Issuers kept primary market busy as they attempt to gain from easy money market conditions and lower coupons. Following a sharp dip in short-term rates, papers of this tenor were particularly in the limelight. AAA 5-year benchmark yield inched down to 9.40% while spread over comparable GoI narrowed further to 143 bps from 154 bps.

The yield curve could witness marginal flattening as longer tenor papers benefit from surplus liquidity following short-term counterpart. Any aggressive monetary soaking measures will keep a tab on sentiment.

Commercial paper

Liquidity condition remained easy throughout the period. In spite of Rs 24,500 crore of bond auctions, average amount of excess funds parked with RBI rose to Rs 53,966 crore from Rs 48,943 crore in the week ago. Reference CP rate for P1+ rated paper eased to 7.40% from 7.65%. At the 91-day T-Bill auction, the cut-off yield was set sharply lower at Rs 98.29 (6.98%) from Rs 98.25 (7.14%). The 364-day cut-off price too inched up to Rs 93.15 (7.37%) from Rs 93.04 (7.50%).

Forex

The rupee managed to hit a 9-1/2 year high of 39.28/$ but attempts to extend gains were capped. The unit initially slipped to 39.50/$ briefly, failing to take any positive leads from the record-setting stock indices. However, the sheer size of inflows and the stock market rally pushed up the rupee mid-week.

The rupee again got stuck into a range for the rest of the week. The rupee ended the week at 39.36/$, still 10 paise stronger for the week. The rupee is expected to hold close current levels but marginal gains are eyed subject to activity of state-run banks.