All eyes on govt spending

Liquidity crunch has worsened, which is demonstrated by the near absence of bids at the reverse repo auctions. Money market dealers expect the Reserve Bank of India (RBI) to announce measures to inject greater liquidity.

The cancellation of auctions under MSS aggregating to Rs 39,500 crore and suspension of MSS auctions for the past few weeks have not helped much. The dealers expected the central bank to announce a cut in CRR to release liquidity.

The bank has announced the auction of 91-day and 182-day treasury bills for a notified amount of Rs 500 crore each under the regular auction calendar.

The redemption of India Millennium Deposits on December 29 sucked out over Rs 33,000 crore from the system. The liquidity tightness has been intensified with the central and state governments parking around Rs 60,000 crore surpluses with RBI.

This fund would flow into the system if the government starts spending.

CALL RATES
Costs to firm up

Call rates are likely to trade firm as long as the liquidity remains tight. The overnight rates are seen in the 6.50-7 range in the earlier part of this week. Towards the end, the call rates are expected to cross the 7 per cent mark on account of the nearing of the fortnightly reporting Friday.

Banks kept away from the overnight call money market on Thursday last week as the funding cost had shot up tracking the high call rates.

Over the last one week, the overnight call rates have been hovering around a three-year high of 7.20 per cent, almost one percentage point higher than the RBI's repo rate of 6.25 per cent.

INFLATION
To stay benign

Inflation declined by 0.16 per cent to stand at 4.24 per cent for the week ended January 7 as against 4.4 per cent in the preceding week, despite rise in prices of fruits and vegetables and some fuel items.

The decline is likely to take away some pressure from RBI to hike interest rates in the third quarter credit policy review tomorrow, said debt market dealers.

CORPORATE BONDS
Dull week ahead

The activity in corporate bonds market is likely to remain lacklustre as the cash crunch would keep traders away from the market, said a dealer with a public sector bank. The market is likely to watch the movement in oil prices and the RBI's monetary policy review.

Financial services firms are largely in the market to raise resources either through issue of non-convertible debentures or Tier-II bonds. These institutions include National Bank for Agricultural and Rural Development, Bank of Maharashtra, IDBI, HDFC Bank and Hudco.

GILTS
In a groove

Yield on government securities is likely to move in a narrow range as market participants are expected to refrain from taking any fresh positions in a market starved of cash.

Traders said the lingering liquidity shortage has triggered concerns that funds may remain scarce even this week unless the government steps up its spending significantly.

The yield on the actively traded 8.07 per cent 2017 government paper is expected to be in a narrow range of 7.25-7.32 per cent. Further, the government is scheduled to borrow in the first week of February, which is likely to exert further pressure on liquidity.

CURRENCY MARKETS
$ move, FIIs hold key

The rupee is expected to trade in a wide range of 45.25-45.60 per dollar, taking cues from the dollar movement overseas and FII inflows.

A chief dealer said, "The dollar looks volatile in the overseas market. If the Japanese yen or the euro continues to rally vis-a-vis the dollar then the rupee will gain support at those levels. On the other hand, if these currencies slide this week, then it will weigh on the rupee."

Another determinant of the movement of the local currency is the flows from foreign investment. In the forwards segment, premiums will edge up on account of payment pressure. The 12-month premium is likely to be in a range of 2.20-2.30 per cent.