On Friday afternoon, the RBI issued a statement indicating its intention of expediting remittances from EEFC (Export Earners' Foreign Currency) accounts. The news that the RBI has asked corporates to repatriate dollar funds raised by way of ECBs (External Commercial Borrowings) and ADRs (American Depository Receipts) also reduced the pressure on the rupee.

Call rates touch 14 per cent due to tight liquidity
With rupee volatility refusing to fade away, the RBI continued with special repo auctions to suck out excess liquidity. The feedback loop between high repo rates and call rates gained strength through the course of the week and call money rates zoomed to 14.5 per cent amid significant repo subscription.

The amount outstanding in repos on Friday was at Rs 7,135 crore. The second phase of the liquidity tightening measures introduced by the RBI on July 21 came into effect on Saturday. This has further reduced liquidity by around Rs 1,900 crore on account of CRR hike of 25 basis points and by around another Rs 2,300 crore on account of the reduction in refinance available to banks. With Tier-I refinance almost fully drawn around Rs 10,100 crore and no significant coupon and redemption inflows scheduled for the current week, call rates are expected to stay firm around the current levels. T-bill curve inverts.

The 14-day and 91-day T-bill cut-off yields were set at 11 per cent and 10.2 per cent by the RBI at the T-bill auctions conducted on Friday. The devolvement on the RBI was to the tune of Rs 74 crore in case of 14-day T-bills and Rs 53 crore in 91-day T-bills. The 364-day T-bill cut-off was set at 10.75 per cent with Rs 75 crore devolving on the RBI. The T-bill yield curve has thus inverted (in fact, a V-shape), with 182-day and 364-day T-bills being traded at far lower yields than 14-day.

Depressed sentiment in the gilts market
Faced with a weak currency market and an uncertain short-term scenario, the gilts market witnessed depressed volumes this week and trading activity was concentrated mainly in the short-to medium-end. The government placed Rs 6,000 crore of 11.43 per cent 2015 security with the RBI. Though this triggered a mild rally, apprehensions on the forex front soon nullified the gains. The underlying sentiment continues to be depressed, though yields haven't witnessed much movement on a week over week basis.

Defensive portfolio continues
Market participants will keenly watch the volatility in the exchange rate. The repo auctions are expected to continue to pre-empt excess liquidity build-up till the rupee stabilises. As such the market sentiment is not likely to improve significantly. As the risk of a significant downside remains, we continue to recommend a defensive portfolio concentrated at the 1-2 year end while deploying some amount in the 6-year security to benefit from a higher yield pickup.

-- (For the week beginnng Aug 14)