Call money traded between 11.5 per cent and 12.5 per cent last week as the outflow on account of advance tax took its toll on liquidity. Call rates are expected to stay in the 10 per cent to 11 per cent range in the beginning of this week. Good inflows during the next reporting fortnight would improve the liquidity situation significantly and call rates could come down sharply by the end of the week.

Rupee in a tight band

The rupee continued to trade in a narrow band between 43.50 and 43.55 against the dollar. The currency is likely to remain in a trading range at these levels. Forward premia moved in line with call money rates during the week. Six-month premia closed the week at 5.35 per cent and one-year at 5.48%.

Further devolvements in T-bill auctions

Participation continued to be limited in the treasury bill auctions on account of tight money market conditions. Of the 182-day treasury bill, 95 per cent devolved on RBI and the cut-offwas maintained at 9.91 per cent while 73.5 per cent of the 14-day and 75 per cent of the 91-day treasury bill auction devolved. The cut-offs were unchanged at 8.63 per cent and 9.48 per cent, respectively.

Gilts start to rise again

Despite the tightness in money markets, buying interest in gilts has resurfaced. Incremental buying has been mainly in the medium to long end. Prices appreciated about 30 paise in the five to 10-year segment. The bullish note appears to rest on both medium-term and near-term considerations. First, there appears to be little downside in the medium term. Liquidity, inflation and balance of payments (hence currency movement) position look comfortable till the end of the year. In any case, there is an inherent belief that any tightness caused by credit offtake would be countered by CRR cuts, and that RBI would ensure that interest rates do not rise. In the near term, liquidity will improve significantly during the next reporting fortnight. Besides, the RBI has offloadedalmost the entire portion of devolved and privately placed paper through open market operations. This provides the central bank with flexibility to take on private placements in case there is need to release liquidity into the system. The mid-term review of the monetary policy would be announced by the second half of October. The possibility of a rate cut (or at least the speculation on this possibility) is likely to drive prices ahead of this.

These factors make a case for increasing the duration of the portfolio.However, the short end has moved up sharply in the last fortnight and could give maximum returns as soon as liquidity eases a bit. Hence, we maintain our bias at the short end with a view towards booking profits over the next couple of weeks. We also look at taking increased positions at the long end to participate in any rally.

(For the week ending September 25, 1999)