Benchmark rates pick up
Benchmark rates on government Treasury bills, on the decline over the recent past, have bottomed out and increased as seasonal demand for physical money picks up.
This week’s primary auction saw the three-month Treasury bill rate increase to 7.40 percent from 7.25 the previous week. The six-month rate increased to 8.42 percent from 8.33 percent and the one-year Treasury bill rate went up to 9.26 percent from 9.17 percent from the previous week.
The auction was of maturing Treasury bills amounting to Rs. 12 billion. Bids amounting to Rs. 15.5 billion were revived and the Central Bank accepted Rs. 6.2 billion.
Dealers said there were several factors for the benchmark yields to move upwards.
Seasonal demand for physical cash is increasing, which means banks are seeing more rupees move out as consumers prepare for the festive season. This accounts for the slight drop in demand for Treasury bills which moved rates upwards.
"It is a seasonal trend. By January next year the cash will start coming into the banking system and benchmark yields should stay around this range for the rest of the year and early 2010," a dealer said.
Dealers said persistent open market operations of the Central Bank with which excess liquidity was being mopped up from the system also affected the benchmark rates.
Rates have increased slightly on the Central Bank’s open market operations which are now at 8.35-40 percent levels.
The policy rates are between 7.5 percent (repurchase rate—the rate earned by banks when excess liquidity is placed overnight with the Central Bank) and 9.75 percent (reverse repurchase rate—the rate at which banks borrow from the Central Bank to cover overnight positions).
So when mopping up excess liquidity in the market, open market operation rates have to be higher than 7.5 percent in order to attract the rupees.
After inflation began to decline during the latter stages of 2008, the Central Bank has also relaxed its tight monetary policy stance, bringing down policy interest rates at various stages in a bid to stimulate the growth of credit.
While benchmark rates too followed this trend, credit to the private sector did not pick up, declining from December 2008 before seeing a slight recovery last September, although compared to September 2008 it was not an improvement.
Inflation went down to 0.7 percent last September but has picked up since, recording 2.8 percent in November. The Central Bank said it expected inflation to pick up throughout 2010 but remain in single digit levels.
The exchange rate, meanwhile, was hovering around the Rs. 114.35 mark against the dollar last afternoon.
"We are now in a managed float with the Central Bank announcing a rate band within which the market has to operate," a dealer said.
"State names acting for the Central Bank would offer 114.15 to prevent the rupee appreciating beyond this point against the dollar. They would also offer 114.40 to prevent a rupee depreciation beyond this point.
"This does not mean that dollars are traded at these levels. These rates are offered only to prevent wide fluctuations. Rates actually being quoted by the market is somewhere around the 114.35 mark," a dealer said.
Another dealer said it was like having a managed float although the exchange rate band did not actually exist where the Central Bank would make an announcement each morning telling commercial banks that trade is possible within a given band. "But in practice through state-bank intervention there is one," he said.
Dealers said foreign currency inflows continued to come in with Central Bank purchasing the dollars and releasing rupees. The banking system held an excess stock of rupees on Thursday night amounting to Rs. 26 billion.
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