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Food inflation continues to worry; RBI OMOs support sentiment
Government securities
Sovereign bonds ended lower today as a surge in the weekly food price inflation
and comments from the deputy governor heightened concerns that the central
bank may raise key policy rates next month to rein in the soaring inflation. Food
articles inflation rose to 14.44% compared in the week to Dec 18, from 12.13%
week before. Bonds, however, ended off intraday lows supported by scheduled
OMOs of INR 240bn in the next two weeks, as part of the liquidity management
strategy.
The ten year bond ended 1 basis lower at 7.91% after touching an intraday lower
of 7.95%. The 8.13% 2022 bond was the worst hit intraday, on view that the
central bank is unlikely to buy the bond again through OMOs after its buyback on
29th Dec for INR 55bn.
Non-SLR market
Short end rates tumbled 15-20bps as fund houses rushed to make purchases on
inflows in their liquid schemes. Banks mopped up about INR 32bn through
issuance of CDs. State Bank of India placed INR 17.50bn of March maturity CD at
8.65% while State Bank Travancore placed INR 3bn of June maturity CD at 9.40%.
Andhra Bank placed INR 5bn of three month CD at 8.95%.
Kesoram Industries placed INR 300 mn of three month CP at 9.25% while L&T
Finance placed INR 750 mn of three month CP between 8.94% - 9.00%. ICICI
Home Finance placed INR 500 mn of three month CP at 8.75% while Manapurram
placed INR 500mn of April maturity CP at 10.31%.
Money markets
LAF borrowing dropped to the INR 1trn mark compared to INR 1.30trn on
Wednesday, owing to skewed borrowing by banks to meet their reserve
requirements. Overnight rates ended flat as demand for funds slowed down
towards the ended of the reporting cycle. Call rates ended at 6.75% while the
CBLO rates closed unchanged at 6.24%. Money market volumes dropped to INR
729bn compared to INR 820bn on Wednesday.
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