Rupee tracks political events

The Rupee breached 43/$ falling to a low of 43.08/$ on Monday but later recovered a bit. The Rupee has been swinging in the 42.70/$ to 42.85/$ range in tune with the chances of formation of a government. We expect the volatility to continue till the political situation is clearer. However, the rupee is not expected to fall below 43/$.

Market preference for longer treasury bills

With average call rates expected to be above the 8 per cent bank rate during this reporting fortnight, interest was subdued inthe 14-day treasury bill auction. The cut-off was kept unchanged at 7.84 per cent and 23 per cent of the notified amount devolved on PDs and RBI. The other two bills were fully subscribed, with 91-day T-bill cut-off unchanged at 8.44 per cent and 364-day T-bill cut-off declining 5 basis points to 9.95 per cent. The credit policy has indicated the introduction of a treasury bill auction calendar with notified amount. 182-day T-bills are also to be introduced with auctions on a fortnightly basis (on Wednesdays alternating with the 364-day auction). Over the next few days, PDs will have to make a minimum bidding commitment for each auction as a percentage of the notified amount and the minimum bidding commitment of all PDs is expected to cover the entire notified amount. This move will improve the distribution of T-bills and improve liquidity.

Record amount issued in April With the private placement of Rs 5,000 crore of 12.40 per cent 2013 security at Rs 101 on Friday, Rs 18,000 crore dated securities havebeen issued this month so far. Including transactions at the OMO counter, the market has absorbed about Rs 13,000 crore of dated securities in addition to Rs 6,933 crore State Loan issue.Liquidity is tight this week, and we do not see a lowering of yields. Post the private placement on Friday, an auction appears unlikely this week. However, the next auction is again likely to be at the longer end of the maturity spectrum. We recommend a portfolio concentrated in the below 4-year segment.Lending rates for banks liberalised Banks have been permitted to fix differential prime lending rates depending on maturity. Banks have also been permitted to offer fixed rate loans. These measures would permit the banks to determine their lending yield curve (in addition to the borrowing yield curve) and help banks manage their ALM better.

Corporate Paper

The financial Institution yield curve has become very flat beyond two years. Currently, one-year FI paper is trading near 12.10 per cent yield, 2-year 12.8 percent, 3-year near 13.05 per cent, 4-year near 13.15 per cent, 5-year near 13.25 per cent, 6-year near 13.35 per cent and 7-year near 13.5. The steepness at the shorter end, and flatness later suggests the portfolio to be concentrated in the two to three year segment.