Repo-based liquidity is no longer the prime mover of government securities "" the seven-day repo outstanding has come down from Rs 80,000-90,000 crore to around Rs 50,000 crore. |
Instead, the key driver seems to be foreign funds' flow, which is influenced by inflation, the forthcoming Budget and US Federal Reserve's rate move. |
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"Although the bond yields are firming up, we are still having some liquidity in the system. This may limit the rise in the yield on 10-year gilts to the 5.50-5.75 per cent band," said A S Khurana, general manager, treasury, Bank of Baroda. |
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This week there is a net inflow of Rs 1,479 crore. There is an outflow of Rs 2,000 crore due to a treasury bill auction, which is part of the government's borrowing programme and market stabilisation scheme. |
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Inflows total Rs 3,479 crore on account of coupon redemptions and maturing government securities. |
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The market is glued to headline inflation data. Last week it stood sharply higher at 5.89 per cent, above the market's expectation of 5.55 per cent. But that data did not contain the rise in oil prices. This week the data is expected to include oil prices and the inflation rate is seen touching 6 per cent. |
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Investors are also awaiting signals from the government in the Budget. It is expected to clear the picture for foreign investors and boost foreign exchange inflows. |
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Also, the US Federal Reserve's rate move on June 29 and June 30 is keenly awaited. |
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Foreign investors are currently in a 'wait and watch' mode with no firm policy signals emerging from the government. They are expected to review their investments plans for India based on the government's stance towards foreign investors in its Budget and Fed's rate move. |
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Though the markets have priced in a 25 basis point hike in the Fed's funds rate, an increase of the base rate by 50 basis points could deliver a blow to the market. |
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Meanwhile, inflows into NRI deposits have already taken a hiding as renewal of old deposits and fresh deposits have dried up. This is due to the strengthening interest rates globally and the rising inflation rate and depreciating rupee domestically. |
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Call rates to move in 4.25-4.30% range |
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Call rates are expected to remain comfortable in the range of 4.25-4.30 per cent. Currently liquidity remains in excess as Rs 50,000 crore. It is is expected to rise as banks will liquidate their government security holdings for fear of booking losses (due to the falling prices on inflation run-up) in the quarter-end. |
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Liquidity is also expected to get a medium-term boost from the growth in credit, which is likely to go up sharply with current impetus of the Reserve Bank of India on rural credit. For the week ended June 11, non-food credit has registred a growth of Rs 2,880 crore for the reporting fortnight. |
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Brisk trading in t-bill to continue |
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There are two auctions of treasury bills slated for this week. Both will be of 91-day maturity. While one will be auctioned for a notified amount of Rs 500 crore under the regual government borrowing programme, another will be floated as part of the market stabilisation scheme for a total of Rs 1,500 crore. Investors are of the view that the cut-off rates on these papers will be in line with market's expectations. |
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In the secondary market last week, most of the money market investors opted for t-bills to cut down the duration of their portfolios. |
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This is because, longer the maturity profile, higher is the risk of depreciation. While 91-day t-bill is trading at 4.45 per cent, the 364 day t-bill is ruling at 4.62/63 per cent. |
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As the fall in the yields on long-term gilts was not followed by similar fall in short-term ones, similarly, sharp rise in the long term is yet to affect the short term. Brisk trading interest in the t-bill market is one of the reasons of the currenty low yields. |
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