Call money opened at about 11 per cent and quickly fell to 8 per cent level during last week. Gross inflows during the current reporting fortnight are estimated to be over Rs 6,000 crore. However, some part of this could be neutralised through Government security issuances (Rs 2,500 crore auction has already been announced).

The Reserve Bank of India's open market operations have been continuing at a brisk pace. The total amount in the first four days of last week was estimated at Rs 960 crore. This has partly set off the liquidity built-up. Part of the refinance available at 8 per cent continues to be drawn down and the call rate is unlikely to decline below this level. We expect call rates to be slightly above 8 this week, with the possibility of temporary spike on the pay-in date of the auction.

Range-bound trading in Rupee

The rupee traded between 43.53 and 43.57 against the dollar during last week. Reuters quoted a `top official of RBI' that ``any easing ofrestrictions on rebooking cancelled import contracts is not going to be considered.'' Forward rates fell a bit as money market rates declined but the drop was limited by importer covering demand at lower levels. Six-month forwards ended the week at 5.2 per cent.

364-day bill cut-off raised

The 364-day bill cut-off was raised by four basis points to 10.35 per cent with Rs 355 crore of the Rs 500 crore notified amount getting subscribed. The cut-off yields were held steady at 8.63 per cent and 9.48 per cent, respectively, in the 14-day and 91-day treasury bills. The devolvement on the RBI was to the tune of 36.5 per cent of the 14-day bill and 28 per cent of the 91-day treasury bill. Easier liquidity should see the participation in treasury bill auctions improving this week.

Spectre of auctions dampens gilts

Ironically, improved liquidity impacted gilts adversely. With the redemption of the floating rate bond (FRB) 1999 as well as the Government salary bill towards the end of the monthcoinciding with the WMA limit moving to the lower level of Rs 7,000 crore for the second half of the year, there was a high probability of a Government security issue. Easier liquidity improved the chances of the issue being through an auction rather than the private placement route.

This possibility impacted market sentiment. Gilts at the long end lost about 10 paise of the gains made at the beginning of the week. On Friday afternoon, market apprehensions were justified with the announcement of Rs 2,500 crore auction of 12.32 per cent 2011 security on September 28.

The size of the issue was well below of what the market was expecting. The overall liquidity appears to be comfortable during this reporting fortnight with net inflow of about Rs 2,500 crore provided another auction is not held. The risk emanates mainly from OMO sales. At this time, the net monetisation on account of government borrowings (private placements plus devolvements on RBI minus net OMO sales) is negligible, and the steady drain ofliquidity would stop if RBI shuts the OMO counter for sometime.

The currency market is stable and there appears to be little compulsion for keeping liquidity tight due to forex considerations.

The short end of the curve is likely to react the most to any improvement in liquidity. If yields drop down in this segment during the week, switch towards the longer end. There could be a rally ahead of the credit policy on market speculation of a cut in banks' cash reserve ratio (CRR). Increasing portfolio duration would help ride such a rally.

Corporate paper

The rates of commercial papers (CPs) have declined following easier call rates. One month P1+ CPs are trading near 9.7 per cent - 9.8 per cent and three-month between 10.3 and 10.5 per cent. Primary CPs with a duration of 90 days were placed at 10.25 per cent by the end of the last week after having hit a peak of 11 per cent earlier. There could be further decline in CP rates if call rates remain easy during this week.

There was some biddinginterest in financial institution paper. One-year primary paper continues to be near 11.4 per cent. In the secondary market, two-year paper is being quoted near 11.90 per cent and three-year near 12.10 per cent. Buying interest could pick up a bit this week on improved liquidity.

(For the week ending October 2, 1999)