Inter-bank rates quoted well above 7-7.1% over the week. The rates touched a high of 8.25% on account of liquidity constraints brought about by the CRR rate hike taking effect and treasury bill/bond auctions. Pressure on call rates was also felt, as banks appeared to be covering products well in advance even as traders hoped that government spending at the start of the new month would help shore up cash. At the LAF, the RBI absorbed an average of Rs 305 crore through its reverse repo window and in turn, infused an average Rs 9,727 crore through the repo window.

Call rates could ease in the coming days helped by regular government spending. The easing of ECB and FII investment norms is not likely to have an immediate direct impact on liquidity.

Gilts Market

The yield on the 8.24% 2018 bond moved in a range of 8.03-8.11% over the week. Bonds were weakened by tight cash while pressure from crude prices and inflation persisted. Crude oil eased in the later part of the week, bringing respite to the market.

Bonds are expected to remain soft, eyeing liquidity with Rs 14,000-crore bill and bond sales lined up this week. The market would hope government spending will help the cash situation.

Corporate Bonds

Yields rose although trading activity improved despite the negative signals for the bond markets on the liquidity and macro front. The 5-year AAA yield quoted around 9.60% offering a spread of 140 bps above the comparable risk-free paper, unchanged from over the week due to a similar rise in the risk-free yield.

Tight liquidity will impact primary market activity while even impacting the secondary market, activity in which improved painstakingly over the past three weeks.

Forex

Rupee got a shot in the arm from the relaxation of ECB and FII investment rules by the government. The rupee shot up to 42.47 in reaction to the announcements. Earlier, persistent pressure from crude prices and month-end demand threatened to push the rupee past 43. Indifferent and choppy stock market and negative flows ruled out an improvement in the condition of the rupee with factors like trade deficit weighing over sentiment. Forward premia edged up while the spot rupee weakened for most of the week.

No extended recovery in the rupee is expected in the immediate term, as inflows remain negative. Stability in stocks, flows and oil would be key support for the rupee.