Call rates may inch up, rupee seen riding high

Overnight cash rates ended at 6.05-6.25%, jumping to a near 3-month peak on the last day of a holiday-shortened week.

At the end of the week, six bids of Rs 7,195 crore were received for reverse repos, down from 18 bids for Rs 22,160 crore on Monday. The Reserve Bank of India (RBI) sold Rs 6,500 crore of T-bills on November 7 and two bonds worth Rs 8,000 crore on November 8. Call rates reached at 7.40-7.60% since concerns of fresh supplies once again rose after RBI announced an increase in the ceiling on MSS bonds issuance to Rs 2.5 lakh crore from Rs 2 lakh crore.

The cumulative CBLO volumes for the week fell to Rs 1,36,059 crore from Rs 1,69,871 crore. The overnight weighted average yield was lower at 5.9002% against 6.0367%. Call rates may inch up since a slew of auctions, a CRR hike effective from November 10 and festival-related spending are expected to keep cash surpluses thin in the near term.

GILTS MARKET
Bond prices in the holiday-shortened week in reaction to the hike in MSS issuance ceiling and oil prices.

Traders were concerned about to the near-term liquidity scenario, where fears of fresh supplies added to the woes. The outflows towards the bond and bills auction and outflows worth of Rs 16,000 crore towards the CRR hike made traders uncertain about the cash levels in the economy. Yields rose on Thursday after the results at a bond auction showed that the primary dealers had underwritten close to Rs 1,000 crore. Earlier, bonds prices inched up to some extent at the beginning of the week tracking softer US Treasuries, but concerns from the local front and high oil prices arrested extended increase. Traders were also worried that there could be a possible rise in state-controlled fuel prices as crude prices rose to a record peak. A decision is likely this week. Trading activity remained thin in absence of major buying in the cautious market. Yields may inch up, in absence any positive triggers for the market in the near term. The government decision on fuel prices will be watched.

CORPORATE BONDS
Yields on corporate bonds rose as a result of drop in excess cash which was reflected by the drop in reverse repo bids at the daily LAF auctions. The primary segment was also dull as concerns over tightening short and medium-term lingered even though current liquidity was sufficient during the starting of the week. AAA 5-year benchmark yield rose to 9.35 % from 9.25% while spread over comparable GOI widened to 135 bps from 129 bps. Trades will only pick up once the market mood over liquidity improves.

commercial paper
Even though the call rates kept steady, the reduction in liquidity was reflected in the rise in CP rates. The reference CP rate for P1+ rated papers rose to 8.21% from 7.93%. At the 91-day T-bill auction, the cut-off yield remained constant at Rs 98.21 (7.31%). The 364-day cut-off price slipped to Rs 92.82 (7.77%) from Rs 93.16 (7.36%).

FOREX
The rupee ended steady at 39.32/33 despite testing higher levels persistently. A market wide dollar liquidation mid-week by exporters and traders, triggered by broad dollar weakening helped the rupee to rally and hit a decade long high at 39.19/$.

But bids suspected to be coming from state-run banks amidst higher crude prices pushed the unit back to 39.30/$. A slip in Asian and local stock markets later in the week also weighed on the rupee.

Forward premia edged up, leaving absolute dollar levels higher. Annualised levels were up by almost 30 bps. The rupee is expected to further rally against the dollar, but upside is not guaranteed.