Rs 4,000 crore of 12.60 per cent 2018 security was privately placed with the RBI on May 20. This has reduced the chances of an auction this week. However, a new OMO list could attract participation. In balance, call rates are likely to be in the 8-8.5 per cent range.

Six-month forwards ease further
Six-months forwards eased below 5 per cent during the week, the first time since August 1997 (when call money averaged below six per cent). By the end of the week, the rates have tightened a bit to 5.15 per cent. The rupee continued to be steady near 42.74 against the dollar. Foreign-capital flows continueto be strong. The rupee is expected to trade in a narrow range around current levels.

Long maturity securities rally
The Rs 4,000-crore private placement last Thursday implies a lower probability of an auction this week. Call rates also appear to have cooled down. As a result, interest in the long-end improved and securities rallied sharply. The 12.32 per cent 2011 security which cut off at Rs 101.65 last week was trading near Rs 102.25. The 12.4 per cent 2013 security appreciated about 50 paise to end the week near Rs 102.65. Securities at the short-end and medium-term remained flat.

As a result, the yield curve has flattened further. As long as call-money rates sustain above 8 per cent, the potential for appreciation in the short end is limited. The upside appears to continue to be highest in the medium to long end.

Cut-off hiked for 14-day T-bills
The cut-off for 14-day treasury bills was raised to 8.11 per cent, with 98 per cent of the notified amount subscribed at this level.The 91-day cut-off was maintained at 8.39 per cent. At this level, market participation was insipid, and 80 per cent of the auction devolved on RBI. An anomaly appears in the auction results.

The 14-day and 91-day Treasury bills received 11 and 12 bids, whereas the new system where every primary dealer has to bid a minimum amount in every auction should ensure at least 13 bids.

The 364-day T-bill auction received better response and was fully subscribed at 10.04 per cent, four basis points higher than the last auction.

RBI has announced the calendar for T-bill auctions. Following the current practice, 14-day and 91-day T-bills will be auctioned every Friday (with payment date on Saturday) for notified amount of Rs 100 crore each. From this Wednesday, 182-day T-bills are being introduced. This will be auctioned on alternate Wednesday (pay-in on Thursday) for a notified amount of Rs 100 crore. The 364-day T-bills will be auctioned on alternate Wednesdays (preceding the reporting Friday, payment onThursday) for a Rs 500-crore notified amount.

Corporate paper
Trading in commercial papers (CPs) was dull during the week. Three-month CPs which had crossed 10 per cent levels in the previous week eased to 9.9 per cent as call rates eased. Two-, and one-month rates remained steady near 9.6 per cent and 9.25 per cent.

Yields of corporate securities continued to fall. The Indian Oil Corporation issue for one-year paper is reported to be oversubscribed at 11.25 per cent. The market's appetite for corporate paper at just 40 basis points above gilts is strange and does not build in the cost of risk capital required by banks.

For the week ending May 29