Market expectations of a repo rate cut once the rupee stabilised, were validated on Wednesday. RBI reduced the one-day repo rates by 25 basis points to 14.25 per cent and the six-day repo rate by 50 basis points to 14.50 per cent and followed it up on Thursday by further reducing these to 13.50 per cent and 14 per cent. Thus, repo rates have reduced by 100 basis points over last week's levels.

Subscription to repo auctions also dropped significantly, with the outstanding repo amount dropping from a high of Rs 13,385 crore on August 25, to Rs 6,370 crore on August 31.

Auction and private placement
Rupee stability brought the spotlight back on the outstanding government borrowing programme. With only 55 per cent of the budgeted borrowings completed, the government on Monday placed Rs 3,000 crore of 10.70 per cent 2020 security with RBI at a price of Rs 93.00 (11.61 per cent YTM). Further, RBI announced yield-based auction of a new eight-year security for a notified amount of Rs 3,000 crore on August 30. The auction announcement capped the ongoing rally and sentiment turned bearish. The total bidding interest of Rs 2,264 crore fell far short of the notified amount and the auction devolved on primary dealers (Rs 1,480 crore) and RBI (Rs 1,270 crore). Rs 250 crore of market bids were accepted at a cut-off rate of 11.40 per cent, which was higher than market expectations by around 5-10 basis points. This triggered a further correction in secondary market yields and the new security touched Rs 99.40 (11.52 per cent) after the cut-off announcement. However, successive repo rate cuts on Wednesday andThursday buoyed the market sentiment - 11.40 % 2008 security gained 55 paise to trade at Rs 99.95 (11.41 %) on Saturday.

Overnight call money rates reacted sharply to the 100 basis points reduction in repo rates, dropping from 14.00 per cent - 14.50 per cent to 8.00 per cent - 9.00 per cent by Saturday. Though Tier I refinance is almost completely drawn, liquidity appears comfortable with Rs 6,370 crore outstanding in repos and around Rs 1,650 crore of coupon and redemption inflows during the week. If the rupee remains stable, RBI is likely to continue reducing the repo rates gradually. Overnight call money rates are thus expected to stay in 8.00 per cent - 10.00 per cent range. Ways and Means Advances to the government stood at Rs 2,056 crore for the week ending August 25. Coupon and redemption payments over the period August 26 - September 8 amount to around Rs 1,800 crore (net of T-bill auctions) while salary payments of around Rs 4,500 crore are also due. Adjusting for these and for Rs 6,000 crore of issuances last week, WMA for the week ending September 8, is expected to be comfortable around Rs 2,000 crore. Thus, demandfor funds from the government is not likely to be significant.

(For week begining September 4)