We expect that the Tier-II refinance would get repaid over this week as call money is available marginally below 10 per cent. Call rates could move towards 9 per cent in the latter part of the week. Other than the Reserve Bank of India's (RBI's) operations on the forex front, the key detriment would be the route by which the next Government security issuance is carried out. A private placement at this juncture would provide some relief to money markets, whereas, an auction would tighten liquidity further.

What has caused this tightness? Before the auction of the 11.99 per cent 2009 security on August 5, call rates had stabilised close to 8 per cent. The incremental refinance drawn duringthe following week is estimated to be about Rs 7,000 crore. About Rs 5,000 crore flowed out of the system on account of the auction and subsequent open market operations (OMO) of the RBI.

In the absence of any other explanations, and taking into account the movement in the currency during that period, we believe that the remaining outflow of about Rs 1,500 crore occurred due to forex intervention.

Rupee continues to be volatile

Following the release of the paper outlining India's nuclear doctrine, there were media reports that the sanctions on non-essential loans imposed last year by G-8 nations might not be revoked. Dollar buying combined with limited FII investments resulted in the rupee dipping below 43.50 against the dollar, and ending the week at 43.57. The forward market followed the trend in the spot market, six-month forwards closed at 5 per cent.

Higher cut-offs in T-bill auctions

Money market tightness took its toll on the primary treasury bill market. The cut-off for 182-daytreasury bills rose 57 basis points to 9.91 per cent. The 14-day treasury bill cut-off was higher at 8.89 per cent, with 65 per cent devolved at the cut-off of 9.48 per cent.

Gilts hold steady despite tight liquidity

Market sentiment remained firm in spite of tight money. Gilts have recovered a large part of these losses made when call rates shot up to 30 per cent. Currently, 10-year yields are just five basis points above their lowest levels seen a fortnight ago. The recovery has not been that dramatic at the short end. One-year yields are near 10.25 per cent, about 30 basis points above the lows in the first week of August. Yields are expected to decline at the short end, as call money rates come off the current 10 per cent levels.

Corporate Paper

It was another week of subdued activity in the corporate short-term market. There were some scattered primary three-month commercial paper issuances at 10.15-10.20 per cent, mostly picked up by insurance companies. September maturitieswitnessed a few deals in the region of 9.75 per cent, primarily from corporates unable to access the call money market.

The FI market was also quiet, with sellers not finding buyers. Quotes in the market are one year at 11.20-11.40 per cent, three years at 11.85-12.10 per cent, four years at 12.15-12.25 per cent, and seven years at 12.55-12.75 per cent.

I-Sec Report

(For the week ending August 28)