Mumbai, Jan 28: I-Sec, in its weekly mark to market, expects that the bank rate to be cut to seven per cent by mid-April based on the need to spur economic investment in the short to medium run by lowering the real interest rate, which is currently estimated at around 6.5 - 7 per cent. The current international interest rate climate is also conducive to lower domestic rates.Said I-sec: "The yield curve witnessed yet another downward shift last week, this time by 5-10 basis point. Both, the 12.50 per cent 2004 and 11.43 per cent 2015 securities dropped 10 basis points to 9.70 per cent and 10.72 per cent (YTM) respectively. The benchmark 11.30 per cent 2010 security, however, registered a drop of only four basis points to 10.44 per cent."
Apart from the positive sentiment arising from increased expectations of a cut in the bank rate, the rally was driven by rumours of a likely restoration of export refinance limits and a possible cut in the cash reserve requirement of banks. Both the latter measures serve to improve liquidity significantly, which in turn increases the demand for bonds", said I-Sec.
The rupee had shown sustained strength against the US dollar since the 50 basis point rate cut in the US earlier this month, gaining 35 paise to 46.33/$ on 23 January from 46.68/$ on 4 January.
However, dollar purchases by state run banks on January 25 triggered a sharp correction, wherein the rupee fell 12 paise to 46.48/$. On January 30, the RBI will auction loans of 13 states carrying a semi-annual coupon rate of 10.82 per cent and maturing in 2011 for a notified amount of Rs 1,568 crore.
Call money rates dropped to 9.50-9.75 per cent this week and average reverse-repo subscriptions fell to Rs 1,000 crore as compared with over Rs 2,300 crore the previous week as the liquidity position improved.
Call rates are expected to ease further in the current week on account of coupon inflows of around Rs 2,250 crore concentrated in the first-half of the week.
There were no Ways and Means Advances (WMA) to the Union government for the January 19 ending. However, adjusting for coupon payments of more than Rs 2,500 crore (net of T-bills) in the period January 20 - February 9 and for wage payments of around Rs 4,500 crore this week, the WMA balances will move close to its Rs 7,000 crore limit.
Reports from the US indicate strong possibility of another 50 basis point cut in the target Fed funds rate when the federal open market committee meets on January 30-31. Any such cut will provide another fillip to domestic sentiment as it would increase the room for RBI effecting a cut in the domestic bank rate without adversely affecting capitalflows.
Copyright © 2001 Indian Express Newspapers (Bombay) Ltd.
