Upward bias in debt paper prices

Sundaram Mutual

THE inflow from the India Millennium Deposits considerably increased liquidity this month.

Consequently, call money rates hovered around 8 per cent. In the government securities market, the prices at the long end rose considerably, pushing down the yields by approximately 0.35 per cent.

With the bonds at the long end moving up, there has almost been a parallel shift of the yield curve from the end-September 2000 to December-end 2000 by about 0.6 per cent. This shift happened with a background of declining oil prices, a comfortable level of forex reserves, high domestic liquidity, and a slowing offtake of credit by the commercial sector. The Government borrowed comfortably at market levels in 2011 and 2015 maturities.

The positive factors that contributed to the upward movement of the prices of securities in December are likely to continue in January also. Hence, caution should be exercised while making duration shifts next month.

SBI Mutual

The rupee has been fairly stable this month, and appreciated by around 10 paise. From Rs 46.78 at the start of the month, it has moved to Rs 46.66 at the end of December. One major boost was the fact that oil prices have steadily come down and are in the $21-$23 range.

Foreign exchange reserves are at an all-time high of more than $39 billion, mainly due to SBI's India Millennium Deposit issue. The RBI is now in a comfortable position since it has enough reserves to combat any adverse movements in the rupee.

The RBI Governor, Mr Bimal Jalan's statements that he expects interest rates to remain stable also improved market sentiment. The US Federal Reserve Bank is on a `neutral' bias with expectations of a rate cut in January 2001.

The trade gap for April-November 2000 was $6.17 billion versus $6.67 billion the previous year. Exports remained buoyant, registering growth of 20 per cent. Non-oil imports remained sluggish. Fiscal deficit for April-November was marginally lower than the previous year. However, expenditure figures have to be cautiously taken and the actual figures can only be known in March. Inflation crossed the 8 per cent level on December 16 as expected. This is mainly on account of fuel prices.

Outlook: G Sec prices are expected to remain stable next month. Oil prices remain a concern since the OPEC is expected to cut production in case oil prices fall below $22. The RBI is expected to announce auctions in long-dated maturities in the 15-20 year range. If the market does not have the appetite for these auctions, the RBI might be induced to effect a rate cut.

The yield on a five-year AAA rated bond is around 11.35 per cent, whereas most banks' PLR is equal to or greater than 12 per cent. The expectations of a PLR cut appear reasonable.

11.30 GS 2010 paper, which can be considered as benchmark yield for 10-year paper and now trading at 11.10 per cent annualised yield, is expected to stabilise at 11 per cent. Any major moves in the market will have to be supported by fresh developments.

(Edited extracts from latest performance reports of mutual funds.)