T-bill cut-offs higher, fully subscribed
At all the treasury bill (T-bill) auctions, cut-offs were higher than previous levels. The 182-day auction cut-off was at 9.91 per cent (9.80 per cent), while the 14- and 91-day auction cut-offs were 7.84 per cent (7.58 per cent) and 9.44 per cent (9.36 per cent).

Rs 5,000 crore auction sails through
The twin-price auction of 11.68 per cent 2006 for Rs 2,000 croreand 12.30 per cent 2016 for Rs 3,000 crore were well-bid, receiving bids for Rs 5,270 crore and Rs 6,048.39 crore, respectively. The 11.68 per cent 2006 cut-off at Rs 102.88 (11.03 per cent), while the 12.30 per cent 2016 security cut-off at Rs 103.49 (11.81 per cent) were very close to secondary market levels.

Long-end gilt yields continue to dip; recommend partial profit-booking
At the beginning of the previous week, we had expected that the Rs 5,000-crore auction outflow would exhaust most of the surplus liquidity in the banking system (consequent to CRR cuts effected in the credit policy).

However, liquidity in the system has been much better than expected, with call rates not moving significantly above 8 per cent levels through the week. Since post-auction levels, long-end securities have appreciated by 30-40 paise within a span of four trading days.

During this week inflow on account of coupons and redemptions total approximately Rs 1,100 crore. Inflows over the next two reportingfortnights (from December 4 to 17 and from December 18 to 31) total Rs 1,312 crore and Rs 4,627 crore. We expect outflows on account of advance tax in December to approximate Rs 7,000 crore, sometime between December 15 and 20.

We believe that sterilisation of forex inflows have significantly augmented rupee liquidity over the past fortnight. Looking ahead, we do not expect significant forex inflows in December, particularly during the second half because of Y2K-related pressures.

Under such a scenario, the advance tax outflow may put some pressure on the domestic liquidity equation. Hopefully, the sovereign borrowing programme ought to have slowed down by then or RBI resorts to monetisation to effectively prop liquidity.

We reiterate our profit-booking view, while maintaining our portfolio bias towards the long end of the maturity band.

Corporate paper
The demand for quality corporate paper continues unabated. Each fresh triple-A rated paper (AAA) issuance is lowering the previous yieldbenchmark. After HDFC raised five-year money at 12.2 per cent, BPCL has raised five-year (effective tenure) money at 12.2 per cent. Demand for short-dated paper is low. Three-month commercial paper (CP) rates are refusing to fall below 10.25 per cent- 10.30 per cent, despite call money levels close to 8 per cent.

The five-year FI paper rate is currently at 12.05-12.15 per cent. The spread of FI paper over `AAA' corporate rates are expected to further widen by 10 basis points over the next couple of months, driven both by supply considerations as well as reduced appetite from the banking sector.

(For the week ending December 4, 1999)