RBI has announced auctions for Rs 5,000 crore today, with the pay-in on Wednesday. This outflow has been balanced by an inflow of Rs 3,500 crore inflow on last Saturday on account of the second phase of CRR cut. We expect call money to trade between 8.25 per cent and 8.5 per cent this week.

Rupee firm in a narrow range
The rupee traded between 43.37/$ and 43.40/$. Dollar inflow was reported to be good during the week. The rupee is expected to stay near current levels this week too. Forward rates continued to be easy with six-month premia trading between 4.8 per cent and 4.9 per cent. Theoutlook on both spot rates and money market liquidity being good, six-month forwards are likely to stay below 5 per cent.

364-day T-bill cut-off declines further
The 364-day treasury bill cut off at 10.22 per cent, 3 basis points below the previous auction. The 14-day treasury bill cut off at 7.58 per cent, down from 8.11 per cent in the previous auction. The 91-day cut-off was steady at 9.36 per cent, with Rs 25 crore devolving on RBI.

Active week for gilts; recommend partial profit-booking
The week began with market expectations of an OMO sale list or auction, and the absence of these led to the continuation of the previous week's rally at the long end. RBI placed the 12.29 per cent 2010 security on its OMO sale window on Wednesday and the window closed within minutes, presumably after the entire stock of Rs 3,500 crore was sold. Despite the incremental supply of paper, prices continued to appreciate, albeit at a slower pace. The OMO sale was followed by a Rs 5,000 crore auctionannouncement late on Thursday.

This is a twin price-based auction of 11.68 per cent 2006 for Rs 2,000 crore and 12.30 per cent 2016 for Rs 3,000 crore. With close to Rs 6,300 crore of inflows expected from CRR-cut and coupon and redemption inflows between November 20 and 27, post auction, we expect most of surplus liquidity to have been negated.

Based on dealt levels recorded on Saturday, security prices, particularly at the long-end were down about 10-15 paise from pre-auction announcement levels. The 11.68 per cent 2006 security was dealt at Rs 102.85/86 (yield of 11.04 per cent) and the 12.30 per cent 2016 security was dealt at Rs 103.50 (yield of 11.81 per cent) on Saturday. Though we continue to be bullish on bond yields over the next couple of months, the near term upside potential appears limited. Based on data obtained from RBI's WSS dated November 20, WMA balances to the central government increased by Rs 5,216 crore over the week ended November 5 totalling Rs 8,728 crore.

Considering that the15-year auction for Rs 3,500 crore was held on the November 11, we feel that the WMA balance has been steadily increasing since then, triggering the second auction. To the extent auctions are used to negate excess WMA balances their liquidity impact is similar to OMO sales operations. We, therefore, believe that liquidity in the banking system may reduce significantly in the near term. However, based on current call rate levels, most of tier-II refinance for primary dealers would be free. The auction pay-in is on Wednesday, and it would be interesting to observe call money levels during the second half of this week.

Further, during the past week, yields upto 2004 maturity have, in fact, increased by 2-10 basis points. This further points at the market's positions at the short-end. We reiterate our profit-booking view, while maintaining our portfolio bias towards the long end of the maturity band.