This is estimated to have led to around $500 mn of inflows. However, the slide in the rupee continued and it touched an all time low closing level of Rs 45.92/$ on Thursday. The rupee regained some of the losses on Friday on weaker dollar demand to close the week at 45.84/$, a net loss of 3 paise over the week. Some state-owned banks reportedly sold dollars at 45.90/$ levels.

Call rates stay high
With repo auctions continuing to mop up liquidity, overnight call money rates remained perched at 14 per cent - 15 per cent.The amount outstanding in repos has exceeded the utilised Tier I refinance, which remained almost fully drawn through the week. Outstanding repo amount is currently Rs 13,385 crore. In view of the continued rupee volatility, repo auctions are expected to continue over the week. Call money rates are likely to stay firm around repo rates.

364-day T-bill cut-off at 10.94%
This week, the cut-off yields in the 364-day and 91-day T-bill auctions rose to 10.94 per cent and 10.50 per cent respectively, up from 10.75 per cent and 10.20 per cent. The auctions devolved on RBI to the extent of Rs 40 crore and Rs 63 crore respectively, reflecting depressed market sentiment.

In the 14-day t-bill auction, the cut-off rate was unchanged at 11.00 per cent with Rs 63 crore devolvement on RBI.

RBI offers switch facility
On Wednesday, RBI announced a switch facility for primary dealers wherein it offered to buy three dated bonds against the sale of two 364-day T-bills.

The next day, RBI added two more T-bills (364-day T-bills maturing Feb 8, 2001 and Feb 22, 2001 at 10.35 per cent and 10.40 per cent yields respectively) to its OMO sale list.

This facility provides primary dealers with exposure to these long-term bonds an opportunity to move into more liquid securities.

Yield curve dips at the short end
The gilts market slid steadily in the first half of the week on rupee worries. 12.50 per cent 2004, which traded at Rs 105.16 (10.72 per cent) on Tuesday, lost 86 paise to trade at Rs 104.30 (11.01 per cent) on Thursday.

The statement on Aug 25 by a RBI official indicating that there were no immediate plans to review interest rates or the EEFC scheme triggered a rally to Rs 104.72 (10.86 per cent) by the week-end. Yields at the one-year end, however, remained around 10.85 per cent, reflecting expectations of high short-term interest rates. The gilts yield curve has inverted at the 1-2 year segment, with 2-year rates being around 10.80 per cent.

Enough liquidity - but all with RBI
The liquidity position continues to be comfortable, as reflected by Rs 13,385 crore in outstanding repos. Ways and Means Advances (WMA) to the government for the week ending Aug 18, has fallen to Rs 1,690 crore, a drop of Rs 7,180 crore. This was mainly on account of Rs 6,000 crore earnings remitted by RBI. The coupon and redemption payments for the period Aug 18 - Sept 12 amount to around Rs 2,000 crore (net of T-bill inflows).

Thus,even with Rs 4,000 crore salary outflows, demand for market funds from the government is not likely to be significant. In the light of comfortable liquidity, stability in the forex market could trigger a small sentiment-based rally at the short - to medium-end.

More than 45 per cent of the budgeted borrowing programme remains to be completed with busy season just a month away.

In the event of rupee-stability, the pressure of liquidity is likely to be maintained by RBI, with issuances replacing repo auctions (also with a view to pre-empt speculative pressure on the rupee). The upside is, thus, not likely to be significant. The nervousness in the bond markets was evident during the week - prices moved almost in tandem with the fortunes of the rupee. Any pressure on the rupee is expected to lead to further slide in bond prices. As the downside risk remains, we continue to stay invested in the short end with some exposure at the medium end to capture any gains from a sentiment-driven rally.