Near-term forward dollar premia trade at a discount

Rupee: Weak close The spot rupee opened at 39.41/42, but closed weaker at 39.56/57 due to acute demand for spot dollars in the market.

According to dealers, most of the foreign banks were buying the spot dollar since there was shortage of dollar funds in the market.

The RBI has been buying spot dollars, but deferring the infusion of rupee funds used for the purchase of the dollars into the system through sell-buy swaps. Thus dollars are available only at a future date.

Over and above this, overseas borrowing of dollars has become expensive since global markets are themselves fighting the shortage of dollars and seeking central bank intervention.

Besides, the usual dollar shortage, the demand on Tuesday also included the refund of subscription money to the portfolio investors (foreign institutional investors) who had participated in the Reliance

Power IPO Therefore foreign banks were also seen contracting sell-buy swaps wherein they bought spot dollars to be sold at a forward date and thus the system received rupees. This led to a drastic fall in the rupee premia paid for booking forward dollars. Dealers added that spot dollar is available at a premium over the forward, which is unlike the usual cheaper spot dollar over the forward.

The cash dollar to be sold tomorrow (cash tom) was available at 42%premia on an annualised basis or at 4 paise premia over the spot rate. This is usually similar to the call rate of 6-7%, at which the banks lend and borrow rupee funds for their daily fund requirement.

The one month forward dollars were available at a discount. The annualised premia for six month and one year forward dollars fell drastically since the spot traded at a premium. The six month and one year forward dollars were available at 1.33% and 1.36% as against 1.63% and 1.52% respectively.

Liquidity: Situation of abundance The liquidity in the system improved substantially with the RBI absorbing around Rs 9000 crore from the system despite a string of outflows slated for this week.

Call rates closed around 5.5/6% and the rates in the collateralised lending and borrowing market (CBLO) fell to 4.5%. According to dealers, the refund of the money towards the subscription of the Reliance Power issue has eased liquidity. There was no fund infusion by the RBI into the market.

G-sec: Energetic trading Though the market was cautious ahead of outflows towards the MSS auctions, there was brisk trading. The prices of government securities moved up in the beginning of the trading session, but fell towards the end since banks resorted to profit booking. The yield on the ten-year benchmark paper closed at 7.51%.

The interest rates in the shorter end of the maturity also fell since the yield on the 91 day t-bills moved down from 7.10% to 7.05%. Dealers expect the cut-off yield on the 91 day t-bill to hover in the range of 6.98-7.05% on Wednesday.

The banks also preferred to set aside funds in the beginning of the reporting fortnight rather than scurrying for money at the end of the fortnight. Reporting fortnight is the Friday of the week when the banks are required to report maintenance of cash reserve ratio (CRR) to the RBI.

CRR is the portion of deposits mobilised by banks in a fortnight and deposited with the RBI as a statutory requirement.

OIS: Edgy times Even as the uncertainty surrounding liquidity in the money market eased, the outlook in the overnight interest rate swap market continued to remain jittery.

According to dealers, even if the sentiment is not bearish, the outlook is uncertain till the outflows occur and a clear picture emerges on the liquidity. The yield across maturities fell marginally by 2-3 basis point. Overnight interest rate swap market is derivative product based on the underlying of the interest rate on the government securities.

The one year segment in OIS witnessed brisk trades and the yield in this segment fell from 6.75-6.70%. There were not many trades in the short term and long term corporate bond market. The triple A 10- year benchmark bond of State Bank of India was trading at 9.12%.

Tracking the SBI bond, Power Finance Corporation announced its plan to raise three year and five year funds at a book built issue.

Since funds could be offered at a highest bid rate in a book built issue, banks are likely to put bids in the range of 8.96-9.03%. PFC will raise around Rs 300-500 crore.