Call rates rise on firm demand for funds

After beginning the week on the higher side, the interbank call money rate reduced as demand for funds subsided, indicating comfortable liquidity in the banking system. The overnight borrowing rate ended at 8% on November 21 as against 7.60-7.75% on November 14. Call rates were slightly elevated at the start of the week as banks borrowed to pay for gilts purchased in the last week’s gilt auction. Banks’ demand for funds rose intermittently to satisfy mandatory reserve needs. Call rates also rose in the last session of the week as banks preferred to lend to the RBI through the reverse repo auction.

Gilt prices strengthen on rate cut hopes

Government bond prices strengthened as sentiment was supported by expectation of a softer policy stance from the RBI, low global crude oil prices and moderation in domestic inflation data. The yield of the benchmark 8.40% 2024 paper ended at 8.17% on November 21 as against 8.22% on November 14. Appetite for bonds improved following Finance Minister ArunJaitley’s comments. The finance minister called for a rate cut by the central bank, saying lower interest rates will help boost the economy. Further, he expressed hope that the Centre could achieve its divestment target set for the fiscal. These remarks were viewed positively as they indicated that the government might meet its fiscal deficit target. However, further gains in bonds were restricted by the rupee’s weakness against the dollar, sporadic profit sales, and trimming of positions before the RBI’s Rs 14,000 cr gilt sale.