Gilts Under Fire; Dollar Fears Linger

Updated: Nov 16 2003, 05:30am hrs
Government security prices came under pressure as hopes of a near term rate cut receded after some overseas central banks raised key interest rates. Concerns over tightening of liquidity following the Centres decision to tighten external commercial borrowing (ECB) norms coupled with a rise in inflation rates also played a part.

The benchmark ten-year yield moved up to 5.13 per cent from its 5.08 per cent with the 7.27 per cent 2013 ending at Rs 116.40/45 levels. On Friday, for instance, short-term papers dropped by 10-20 paise while those on medium and longer tenures finished lower by 25-40 paise. The 9.81 per cent 2013 dipped to Rs 134.70 (Rs 135), the actively traded 8.07 per cent 2017 moved down to Rs 124.10/14 (Rs 124.30/32), and the 7.46 per cent 2017 to Rs 118.75/80 (Rs 119.25/30). The annual rate of inflation inched up to 5.01 per cent from 4.96 per cent in the preceding week.

Sterilisation of forex inflows by the Reserve Bank of India (RBI) is the biggest driver of liquidity. While foreign funds have invested a total of $5.9 billion in local shares and bonds in 2003 till last week and reserves have risen to $92.59 billion in the week-ended October 31, from $91.89 billion in the previous week, there is a feeling that tighter norms on the external commercial borrowings front may tighten rupee liquidity.

Meanwhile, call rates came under slight pressure on reporting Friday due to last minute adjustments in the absence of major lenders. Call rates opened and closed at the same level of 4.40-4.50 per cent, up from its overnight close at 2.50-3 per cent. However, there as no shortage of liquidity. The central bank continued to get a good response at its repos auctions. On Friday, despite the call flare up, the RBI got 48 applications and it accepted all for a total sum of Rs 16,815 crore at the three-day repos auction at the cut-off price of 4.50 per cent, indicating the level of liquidity in the system.

On the forex front, the rupee ended the week at 45.4150/4250, the weakest level since October 15 on fears of a cash-dollar shortage. At certain levels there was renewed exporter dollar sales which led to the unwinding of long dollar position by banks, but operators are still cautious and nervous about worries over cash-dollar supplies. The rupee declined by four paise on Thursday, an it dipped by about thirteen paise during the course of the week.

In the forwards, discounts were seen mid-week, but on the last trading (day), they had moved up. The sixth month annualised forward premium ended at 0.31 per cent. Dealers pointed out that the fall in the bourses, concerns of dwindling foreign inflows and the RBIs buying prompted importers to buy dollar ahead of the weekend holidays. State-run banks also reportedly bought dollars heavily.