Absence of a trigger, quarter-end sell-off by banks and haunting rumours of a possible open market sale from RBI dampened the volumes and value of government securities. Even the coupon and redemption inflows and the absence of action from central bank didn't help. While the actively traded GOI 2011 11.50% bond fell from a week's high of 7.77% to 7.73%, overall the prices fell by 35 to 68 paisa at the medium-to long-end of the curve with almost no interest in the liquid short-maturity securities.
While what constitutes RBI's parameter of "if the economic situation warrants so" for a bank rate cut remains to be seen, the undertone may remain cautiously bullish for some time. But consider this- - An out-of pocket Rs 1000 crore bailout to troubled UTI once again, Rs 6200 crore tax refund claims from corporates and above all borrowings worth Rs 12000 crore in excess as per the RBI borrowing calendar. Its becoming clearer that government, as a customary trend is likely to overshoot its budgeted borrowing target of Rs 1.42 lakh crore for the fiscal 2002-03. This could if not now, suppress the bond yields in the second half of the fiscal due to supply overhang.
Export remittances accompanied by lack of demand for dollars saw the Indian rupee firm up by 9 paisa against the dollar, despite banks intervening to cap the gains. Lifting of border worries and perhaps the sharp appreciation of Japanese Yen and Euro against the US dollar is perking up the Indian rupee as well. What backs the dollar fall is the sharp fall in US equities followed by unabated profit warnings, fear of terror attacks and lack of sustained positive economic data.
The first installment of advance tax outflow from corporates did dampen the liquidity a bit, the extra inflows (coupon inflows and redemptions) coupled with lack of demand held the call rates below the repo rate of 6%. The liquidity glut was evident from a three day repo subscription of Rs 12380 crore, highest in the month so far. Considering the ample liquidity in the market, RBI has lined up a 10-year float of five state government issues amounting to Rs 1065 crore for the next week.
Outlook
Market awaits follow up on RBI's claim to support its soft interest rate bias. Ahead, despite the state auction outflow, government securities should gain marginally. The persistent weakening of dollar against Yen and Euro could possibly put Indian Rupee in competitive mode, as imports for US become cheaper from India. This could strengthen rupee.
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