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Comfortably Placed

The 20-year GOI security auction and the OMO of the 9-year paper, conducted during the week, was oversubscribed, showing ample liquidity in the system. The 10-year GOI benchmark closed the week down three basis points.

Amidst ample liquidity the market moved in a narrow range through the week. Though the yield on the 10-year GOI benchmark closed the week three basis points down (6.37 per cent) over the previous week's close. The week started with an OMO, with the yield set at 6.52 per cent (slightly above the expected 6.45 per cent level). However, government's statement of lowering interest rates on public-saving schemes in the mid-year economic review corrected this. Hopes were dashed when finance secretary clarified that it would not be changed in the near future, putting brakes on the yield fall. The Central Board of Trustees of the Pension Fund also confirmed this and said that it would continue paying 9.5 per cent interest.

While the yield on short-term gilts underwent correction, the slide continued on the long-end of the curve before the 20-year paper was auctioned. The 20-year, Rs 5,000-crore GOI security auction was aggressively bid and was oversubscribed by almost two-and-a-half times. Anticipating that the issue would be over-subscribed, the central bank lowered the underwriting commission by 25 per cent (Rs 0.0075 per Rs 100) vis-a-vis last month's auction.

The yield on 1-5 year tenure GOI securities corrected upwards after the RBI increased the T-bill auction size from Rs 250 crore to Rs 1,000 crore. Consequently, the benchmark AAA spreads over the GOI securities closed at a record low of 37 bps. The yield on Hindalco, one of the most liquid five-year papers, was down by 7 bps at 6.35 per cent over the week.

The call rates after staying below the repo rate till Thursday, finally, closed in the 5.5-5.6 band on Friday. The repos were also aggressively bid; all of which were accepted by the central bank. Subscription to repo auctions were very high and the average auction size was around Rs 16,000 crore.

On the rupee front, the spot exchange rupee rate had one of its most volatile weeks. It opened at Rs 48.29/$, traded at a high of Rs 48.21/$, inching up again to Rs 48.29/$, before finally closing the week at Rs 48.23/$. For third straight week, the forex reserves went up, touching $66.92 billion on November 29, 2002.

Outlook
Since the credit policy, the yield on the 10-year benchmark has come down by 63 basis points. Going ahead, comfortable liquidity, limited supply and the fear of RBI intervention is likely to make yields move in a narrow range.