Inter-bank Markets Are All Smiles

Updated: Dec 22 2002, 05:30am hrs
With comfortable liquidity in the inter-bank system and higher buying interests from state-run banks, whose lending capacity in the overnight call money market has been brought down to 25 per cent of their net owned funds from earlier 50 per cent, government securities (G-Secs) prices once again remained northbound, and G-Sec yields -- which are inversely related to prices -- have been falling in a steady fashion.

The benchmark 10-year yield on the 7.40 per cent 2012 paper was at 6.3169 per cent at the close of Fridays trades. Dealers feel that it was steadily heading towards the 6.25 per cent mark. It may be recalled that FE had predicted on December 12 that the yield would drop to 6.25 per cent. On December 12, the paper closed with a yield of 6.3826 per cent.

Traded volume remained good on the back of improved liquidity condition, despite the outflows towards the advance tax payments. Dealers said that around Rs 8,000 crore has been drained out from the system, but this has had not much impact on the liquidity position.

Market players have shown good buying interest particularly at longer end papers. But, as the widely traded papers saw their yields touching successive lows, dealers with the fear of the Reserve Bank of Indias (RBI) intervention to stop the yield from falling further, changed their focus on illiquid papers.

There was also concerns over the RBI setting higher cut-off yield at the 91-day treasury auctions. "This indicates the central banks uneasiness about the falling yield," dealers said. In the overnight call money market, rates hovered higher as expected -- above the benchmark repo rate of 5.50 per cent, as a fall out of the stricter borrowing and lending norms.

Overall market sentiment is bullish as the inter-bank liquidity is expected to remain comfortable in the near future, getting support from the unabated dollar inflow. The RBI in a bid to curb volatility in the forex market and also to maintain export competitiveness, has been buying dollars heavily and pumped rupee into the inter-bank market. Forex inflows are expected to continue in a similar vein at least till March 2003.

The widened US and domestic interest rate differential -- after the 50 basis points rate cut by the US Federal Reserve -- made investment in India attractive and expatriate Indians have been stepping up remittances in a bid to seek higher yields on their investments. The rupee closed the week at 48.00-02, a new 2002 closing high. The local unit has been hitting its successive 2002 closing lows for the last five days. The rupee was also seen at 47.97 in intra-day trades on Friday.

There is also sizeable dollar supply from exporters as they are selling their receivables expecting steady appreciation of the rupee in the near future. Dealers said software exporters also stepped up remittances and foreign direct investments gathered steam before the year-end.