The cash reserve ratio (CRR) cut announced in the credit policy has boosted liquidity by Rs 4,500 crore on Saturday. Before this infusion, a significant part of Tier-I refinance (available at 8 per cent) continued to be drawn. The auction of a 15-year security would result in outflow of Rs 3,500 crore. Banks are likely to over-cover reserve requirements ahead of this auction if overnight money is available near per cent. Call money is expected to staynear8 per cent this week.

Six-month forwards ease to 5 per cent
The rupee continued to trade around 43.40 to a dollar. Despite higher money market liquidity this week, speculative pressure is not likely to build up in the currency markets, in our opinion. The rupee is expected to trade in a range around current levels. Forward rates have declined by about 50 basis points since the credit-policy statement. Six-month forwards closed the week at 4.94 per cent, and one-year at 5.23 per cent.

Good response in T-bill auctions
The 364-day treasury bill for Rs 500 crore received bids for Rs 1,352 crore. The cut-off at 10.25 per cent was 10 basis points below the previous auction. This is the first time since August that there has been no devolvement in a 364-day treasury bill auction. The 91-day auction cut off at 9.36 per cent, down from the previous cut-off at 9.48 per cent. The 14-day cut-off was higher at a realistic 8.11 per cent, compared with 7.32 per cent in the previousauction.

Auction of 15-year paper announced
The inflow of Rs 4,500 crore on Saturday--due to the CRR cut and exemption of foreign currency non-resident (FCNR-B) deposits from CRR--was widely expected to be mopped up through a combination of government security auctions and open market operation (OMO) sales. The absence of an auction announcement till Friday led to gilt prices at the long and appreciating by about 15 paise during the week, a total appreciation of about 30 paise since the policy announcement.

On Friday, the Reserve Bank announced the the auction of a 15-year paper for a notified amount of Rs 3,500 crore. The auction will be held on 11th November. The bullish sentiment in the market was not impacted by the announcement; in fact in late trades long-end security prices appreciated by a further 2 paise, while Saturday witnessed prices appreciating 61-10 paise. We expected the auction cut-off in the 11.85-11.88 per cent range. If the paper cuts off at 11.85 per cent or lower, the longend is expected to appreciate by another 20-25 paise over this week.

The downside risk at this stage is minimal. We expect the yield curve to continue on its downward move, and maintain our bias towards the long end of the maturity spectrum.

Corporate paper
CP rates have declined following easier liquidity and lower call money rates. Currently, one-month CPs are trading at 9.25-9.50 per cent and three months at 10.35 per cent. Bonds and debentures have also appreciated this week. Yields of five year AAA debentures have declined by 10 to 15 basis points and are now quoting at 12.25-12.30 per cent. The spread of F1 bonds over corporate debentures has started to widen. Some banks are likely to have exposure limit problems with FIs after the recent reduction in maximum exposure to 20% (from earlier 25%) of the lending bank's net owned funds.