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Debt Market Round-up

It was a happy ending to a week that took off on a turbulent note. Continuing at their high levels since the introduction of the new liquidity adjustment mechanism, the call rates started off from the

It was a happy ending to a week that took off on a turbulent note. Continuing at their high levels since the introduction of the new liquidity adjustment mechanism, the call rates started off from their previous close of over 8 per cent. Calls ruled high, despite the first trance of CRR cut getting effected in May 19, as liquidity was affected with the auction late last week. The expectations of an auction towards the end of the week doing the rounds also pushed up the demand for overnight money.

However, with the RBI infusing Rs 4125 crores in to the system through its reverse repo and the redemption and coupon payments later in the week saw the call rates coming down crashing to 7- 7.5% levels. Lenders, after a long spell of over a fortnight, offered some part of their surpluses in the repo market so as to prevent the call rates from falling through the floor. Even while the RBI rejected a bid for Rs 6500 crores on Wednesday, it signalled its comfort with the liquidity accepting bids worth Rs 7000 crores subsequently.

The rupee was largely driven by altogether different concerns. Fuelled by the rising global oil prices, the rupee weakened earlier in the week, even as the domestic instability added to the concerns. The rupee touched an intra-day low of 47.03 against the greenback on Tuesday, as the crude prices went over the $30 mark, for the first time in three months. However, aided by strong inflows from foreign banks and the support for domestic banks, it regained ground to close at Rs 46.95. The forward premiums, ebbed tracking the call rates.

Even as Government Securities slid on the fears of the instability at the centre, the quick solution to the impasse coupled with the surfeit of the liquidity, saw the sentiments reverse. With the longer dated papers having already rallied on the expectation of the bank rate cut, this time around the rally was centered around the medium maturity papers. Further, interest also picked up in the rather illiquid counters of 2010 and 2011, thus narrowing their yield differential with their liquid counterparts.

Outlook

Government of India have announced two auctions for 29th May of a 12-year and 20-year paper aggregating to Rs 5,000 crore. Barring a few, the government has aggressively perused its agenda of stretching its maturity of sovereign bonds. While the markets have responded positively so far, it might just vet the markets appetite for such longer dated issuance. Even as the Fed string of rate cuts may be nearing an end, the RBI is yet to respond to the widely expected rate cut. Sentiments likely to remain dampened, but for any indication from the Central Bank.