Traders are closely watching the government’s move on auction of fresh securities in light of tight liquidity conditions in the market. They are, in any case, expecting the yield on the 10-year government bonds to harden by 15-20 basis points next week.
Though the government went ahead with its planned borrowings of Rs 12,000 crore this week, the market is expecting some tweaking in the next few weeks. So far, however, the government has not made any statement on the matter.
Besides, given that the Centre has availed of ways and means advances of Rs 21,65 crore at the end of May 21 and the fact that it had to resort to issuing two rounds of cash management bills, the government itself does not seem to be flush with cash at present.
But, the situation is certainly going to improve, at least for the government, as it has lowered the treasury-bill auction size for June by Rs 22,000 crore to Rs 15,000 crore.
There will still be pressure on liquidity. Between Monday and July 2, when the special liquidity window opened by RBI ends, the Centre had planned to raised Rs 63,000 crore from the market by issuing government securities. The borrowings add to the outflow from the system that has to immediately deal with the payment of 3G spectrum fee of over Rs 67,000 crore. By June 15, there will be more pressure, as companies will have to pay the first installment of advance tax.
Call to stay above 5%
Banks are parking less through RBI’s reverse repo window, with net surplus of Rs 6,200 crore on Friday, as against Rs 47,000 crore a week ago.
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Rates and volumes in the call money market have also hardened from a range of 2.5-4 per cent on May 21 to a high of 5 per cent yesterday.
Dealers expect call rates to stay above 5 per cent this week, too as the real impact of the 3G payments will become visible.
To make sure there is adequate liquidity in the system, the Reserve Bank of India has virtually lowered the statutory liquidity ratio, the ratio of funds banks are supposed to maintain in liquid government securities by 50 basis points.
It has also introduced a second liquidity adjustment facility auction.
RBI’s announcement received a tepid response from the bond markets on Friday, with yields on the benchmark 7.80 per cent paper settling at 7.54 per cent after hitting a high of 7.64 in intra-day trading.
On Wednesday, it had ended at Rs 101.93 or 7.52 per cent yield. According to bond dealers, the outlook might prompt the government to either defer next week’s scheduled auction or trim its size.
“This is a temporary squeeze in liquidity because the money being paid to the government will come back into the system in the form of government expenditure. However, there will be a lag of as much as a month between the liquidity going out and coming back into the system, which will put pressure on yields,” said the treasury head of a large public sector bank.
Rupee to track equities
The currency markets are expected to track the performance of the equity markets and a weak opening on Monday might put further pressure on the rupee. Given the recent volatility in the currency markets, traders are unwilling to hazard a guess on the rupee’s trading range.
The rupee gained 1.3 per cent over the last week. It started the week on weak note by losing 6 paise against on the dollar. However, it managed to recoup its losses and rose to its weekly high of Rs 46.36 against the dollar on Friday, aided by a rally in the equity markets.