Call money stays close to 8%

Liquidity was comfortable last week. Call rates were close to 8 per cent for most of the period. The Reserve Bank of India's open market operations (OMO) continued to attract participation and Rs 812 crore of the 12.60 per cent 2018 security is estimated to have been sold last week (till RBI exhausted its stock of this security). Call rates are expected to be in the 8-8.25 per cent range this week.

T-bills cut-off at higher yields

Cut-offs were higher in all the three treasury bill auctions this week. The 14-day T-bill cut-off was pegged at 8.63 per cent, the 91-day at 8.98 per cent and 182-day at 9.76 per cent. All the auctions were fully subscribed. The cut-off yields appear a bit morerealistic, though the 182-day bill is still below secondary-market levels. The lack of interest in this bill is evident from the fact that no secondary market deal has taken place in this instrument since it was introduced on May 26.

Rs 5,000-cr auctions at the long end

RBI has announced price-based auctions of 12.32 per cent 2011 security (Rs 2,000 crore) and 12.40 per cent 2013 security (Rs 3,000 crore) to be held on June 16. With these auctions, issuances of dated securities this fiscal would total Rs 37,000 crore, out of which Rs 23,000 crore have been of 10-year and higher maturities.

With call rates staying above 8 per cent, the appreciation potential has been low at the short end. Many market participants are confident that RBI would maintain stable interest rates (with liquidity infusion if required), and market interest has shifted to the higher yield, higher duration long end. The market has picked up over Rs 8,000 crore of the longest maturity bond (12.60 per cent 2018) during thisfiscal.

Under this scenario, market participation may be expected to be good at the auctions. However, the auction outflow is just ahead of the first installment of advance tax outflows (estimated at Rs 4,500-5,000 crore). Any adverse news on the Kashmir imbroglio could also skew market sentiments. Hence, prices are expected to be soft this week. We recommend a low risk strategy of staying in short to medium tenor securities.

Industry shows signs of growth

IIP figures released for April 1999 shows 6.8 per cent growth, with the manufacturing sector recording 7.8 per cent growth. This combined with strong growth in tax collections might be seen as evidence of an increase in industrial activity. However, the figures have to be seen with caution. Trade continues to be poor with decline in non-oil imports. Also, the official preliminary estimates are frequently inaccurate and undergo drastic revisions.

Corporate paper

Easy call rates resulted in renewed interest in the commercial papermarket and turnover is estimated to be in the region of Rs 150 crore. One-month CP rates declined to 9.3 per cent, two-month to 9.5 per cent and three-month to 9.85 per cent.

However, bids disappeared towards the end of the week after the government security auction was announced.

Lack of fresh primary issuances has resulted in higher secondary market activity in FI paper, especially in the four to seven year segment. Trading volumes during the week is estimated to be over Rs 100 crore. Four year paper traded near 12.75 per cent and seven-year near 13.15 per cent.

In the primary market segment, L&T issued an innovative instrument called revolving debenture facility. The tenor of the paper is 10 years. At the end of every year, the coupon will be reset by the issuer while the investor has the option of selling back the instrument to the issuer. If the paper is bought back by the company, it will be resold in the market.

This mechanism has enabled the company to raise 10-year money at rolling one-yearrates. Of course, the issuer carries the market risk in case interest rates tighten. The issue was placed at 11.20 per cent for the first year.

For the week ending June 19, 1999