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V. Ravi Kumar

As there is a shortage of short-term G-sec bonds in the secondary market, there should be overwhelming investor interest for this security. At current levels of forward premium, investment opportunities for banks are dwindling and there is sustained interest to invest in `AAA' rated paper.

THE saga of a strengthening rupee continues as the dollar fails to make much headway against it. It has spent a good deal of time now around the year's low of 48.80.The market is still dominated by continuing dollar supplies at every rise in the dollar.

The clearest sign that rupee traders go by the trend in the yen occurred on Friday last, when in spite of the spot date shifting to the next week over a reporting Friday, the dollar slipped to 48.76 levels on the back of a stronger yen that hit 116 levels then.

There is nothing much to add to the analysis of the last week where we proposed that the rupee strength is likely to continue and were the yen to weaken past the 116 stage, we will see further strength in the rupee to the low 48 seventies.

For now, the dollar is supported at 48.76 and the test and break of this level is keenly awaited. Sliding forward premium levels have failed to bring in any sustained importer forward covering.

This once again testifies to the strong rupee view and the present levels of forward premium do not really represent spot `future' prices.

It does seem very likely indeed that sooner rather than later, banks will have to consider lowering their deposit rates. In the recent past, on a held for trading basis, `AAA' corporate bonds have outperformed the Government securities.

Commercial paper rates of top rated corporates are only marginally better than the bank rate of 6.5 per cent. A few days ago, the yields of top rated corporates traded for a three-month tenor at 6.86 per cent and IOC placed a 90-day commercial paper (CP) at 6.90 per cent.

Buoyed by the high liquidity levels in the market, Reserve Bank of India has announced auction of Rs 7,000 crore of securities for next week.

Though this issuance is "outside" the calendar announced earlier this year, this issue should sail through comfortably, further adding to the bullish undertone in the money markets.

For the first time ever in the country , a 10-year bond with a 5-year put/call is being issued. As there is a shortage of short-term G-sec bonds in the secondary market, there should be overwhelming investor interest for this security.

At current levels of forward premium, investment opportunities for banks are dwindling and there is sustained interest to invest in `AAA' rated paper.

This trend is expected to continue till such time other investment opportunities emerge. With the consequent pressure on spreads, there is little option for banks now but to lower the cost of their liabilities.

The dollar spent the week around the 99 cent mark to the euro with plenty of euro sellers above the 0.9930 mark. Economic data from the US continues to be weak, with the Michigan

Consumer confidence index sliding to 86.5 from 92 earlier. This is the lowest for this index since November 1.

The most likely explanation for this slide seems to be the performance of the stock markets. This is one more example of how topsy-turvy financial markets are getting by the day! Hitherto, economic data has always affected stock markets, now the cart is definitely in front of the horse.

Carrying the analogy further, the financial markets seem to be driving the real economy rather than vice-versa. In the US, for instance, the lower stock prices affect personal wealth and consequently lower consumer spending and consumer confidence indices.

Amidst all this doom and gloom for traditional dollar bulls, currency forecasts by analysts seem surprisingly benign.

A recent survey showed that the average forecast for the euro-dollar for the next three months at 99 cents and in 12 months at parity.

In spite of all the problems facing the US economy, analysts and forecasters seem unwilling to write off the dollar.

(The author is Head, Treasury, at Vysya Bank, Bangalore. The views expressed are his own and not necessarily those of his employer.)

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