Rupee in volatile trade

The rupee fell sharply to 43.32 against dollar in the first two days of the week but recovered subsequently. By the end of the week, the rupee was trading close to 43.15 against dollar. However, sentiment continues to be nervous and there could be another bout of high volatility on border events. Forward rates also spiked with the fall in spot, but six-month forwards eased to near 5 per cent levels by the end of the week.

364-day T-bill devolves

Cut-off for the 364-day treasury bill was maintained at 10.35 per cent, and Rs 275 crore of the Rs 500 crore notified amount devolved on Reserve Bank.The 14-day treasury bill cut off remainedunchanged at the previous week's level of 8.63 per cent. Yields at the 91-day T-bill climbed by a basis points to 9.02 per cent with 35 per cent development on RBI.

Caution: Tightness ahead

The government security auctions last week received mixed response. The Rs 3,000 crore 12.40 per cent 2013 security auction cleared at Rs 101.68, about 12 paise below the secondary market levels earlier (for Rs 5 crore lots). Response was marginally lower at the Rs 2,000 crore 12.32 per cent 2011 security auction, as the cut off was at Rs 102.18 (10-12 paise below earlier secondary market bids for Rs 5 crore lots), with Rs 270 crore devolving on primary dealers. The next couple of reporting fortnights are expected to witness tighter liquidity conditions than those witnessed over the last couple of months.

Interest at the long end has been high this fiscal. The main factors are a floor on short-term yields (due to a floor on call at the 8 per cent bank rate), and improved liquidity chasing higher yield pick-upat the long end. Many market participants have availed of the refinance available at 8 per cent and leveraged these to fund high duration bonds.

The strategy is, of course, a risky one if any events cause a tightness in yields. The semi-annual yield pick-up between a three year bond and a fourteen year bond is currently about 100 basis points. For a holding period of one-month, this provides a pick-up of about 9 paise. This can be negated if the yield curve steepens by 2 basis points.Under the current scenario of high uncertainty on account of border tensions, the 100 basis point pick-up between two and fourteen-year bonds does not appear to have factored in the higher risk. We recommend a strategy of staying in the shorter maturities.

Mutual funds: Vehicle for wholesale investors?

Tax provisions for this year have made mutual funds an ideal investment vehicle for tax paying investors.

The investor has to compare the post-tax returns of direct investment with the pre-tax returns less dividendtax and mutual fund fees (annual AMC fee and entry/exit loads) adjusted for possible indexation benefits.

Many wholesale investors (including corporates) have taken advantage of this, and mutual fund collections have grown exponentially in the last quarter.

Corporate paper

Volatility in the forex markets and the threat to call rates induced some selling in CPs and the CP yield curve flattened a bit. One-month CPs dealt at 9.5 per cent-9.6 per cent, two-month at 9.7 per cent-9.85 per cent and three-month at 9.85 per cent-9.95 per cent. Some panic selling pressure was seen in short term FI paper with a six-month residual maturity paper dealing at 11 per cent 3-4 year FI paper dealt in the 12.5 per cent-12.7 per cent range.

In the primary markets, Reliance Industries issued a 5-year paper with a 3 year put option at 12.1 per cent. A similar paper with the addition of an American call option between 1 and 5 years was issued at 12.2 per cent. Tata Chem was downgraded from AA+to AA, the companyraised Rs 200 crore for 7 years at 13.25 per cent per annum.