CALL money rates opened last week near 8.5 per cent and tightened to 10 per cent by the end of the week. This was possibly due to Rs 2,500-crore Government security auction coinciding with half-year end considerations and two banking holidays during the week. Call rates are expected to start easing this week as liquidity flows back into the system.

Rupee slides a bit

Month-end pressures led to the rupee sliding a bit and touching 43.61 against the dollar before ending the week at 43.59. Forward premia also tightened a bit; six month premia ended at 5.62 per cent. Trade figures for August are slightly encouraging. Exports grew at 10.4 per cent during the month and imports at 19.4 per cent. Non-oil imports grew at 4 per cent after a decline of 6 per cent in the first four months of the fiscal. Oil imports have increased 57 per cent in the first five months, reflecting the increase in global oil prices. Trade deficit at $3.96 billion is only marginallyhigher than $3.90 billion recorded in the corresponding period last year. The rupee could begin a slow downward crawl once the election process gets over. We expect the rupee to be between 43.55 and 43.65 against the dollar this week. Politics would be the main factor driving sentiment in the forex market this week.

91-day, 182-day T-bills devolve

The entire notified amount of the 91-day and 182-day treasury bills devolved on RBI and the cut-off yields were maintained at 9.48 per cent and 9.91 per cent, respectively. The 14-day treasury bill was fully subscribed, cutting off at 8.37 per cent.

Auction results positive for gilts

The Rs 2,500 crore auction for 12.32 per cent 2011 security received bids for Rs 5,853 crore and the auction cut off at Rs 103.57, just 3 paise below the prevailing secondary market price. This shows the market's inherent bullishness and has resulted in prices staying firm despite money market tightness. The focus this week would be on the election results and theformation of a new Government. Considering the fact that bond prices have been firm through the political uncertainty of the last six months and the Kargil crisis, there is little cause for concern even if the election does not result in a comfortable majority for either of the two main formations. The main concern could emanate from the forex market in case the results spell a further period of political instability.

Speculation regarding measures in the mid-term review of the credit policy including the possibility of a CRR cut could rule market sentiment. We recommend increasing the portfolio duration to take advantage of a potential rally based on positive expectations from the credit policy.

Corporate Paper

Though net liquidity improved substantially during the last week of September, short-term rates did not decline, primarily due to half-yearly pressures. The commercial paper (CP) yield curve was relatively flat between 10.10-10.30 per cent for maturities between one and three months. Withcall rates expected to ease this week the CP market should witness more activity. However, we do not expect any significant downward movement in yields.

Profit-booking resulted in some amount of pressure at the short-end of the FI yield curve. Two year rates increased by 5-10 basis points to 11.90- 11.95 per cent, while the one-year rate ranged between 11.40-11.50 per cent.Buying interest from the provident fund segment caused appreciation at the long-end. Three and five year yields declined by 10 basis points. With primary supply expected to persist over the next couple of months we do not expect significant appreciation from current level.

(For the week ended October 9, 1999)