Ample liquidity will help overcome inflation concerns

OUTLOOK / Money Markets

Liquidity will remain abundant and it is the only factor to cheer the markets. This is because a liquidity-driven rally will be countered by a rising inflation which stood at 4.4 per cent as against the expected rate of 4.3 per cent.

There are apparently no riders either in the form of huge outflows and open market operations.

This is because the government has not only cancelled auctions in April but may also cancel borrowings in May if the surplus is adequate. The outflows this week is likely to be limited to the 91-day treasury bill auction.

Surplus liquidity in the system is to the tune of around Rs 90,000 crore which is locked in with the Reserve Bank of India (RBI) in the form the seven-day repo. Even if the amount in repo has been going down, it edged up last week.

Inflows will be to the tune of around Rs 7000 crore through redemption of treasury bills and gilts, and coupon payments. There is an on-tap sale of the 5.60 per cent state development loan, aggregating about Rs 6500 crore on April 21.

The sale will be conducted for all 28 states. In addition to the existing liquidity, the RBI's sterilisation activity to prevent the appreciation of the rupee is going to accelerate in the coming weeks.

Overnight rates may stay flat

Call rates are expected to rule lower as there is not much demand for liquidity, primarily because there were no major outflows in the preceding weeks.

With the seven-day repo in place, players were preferring to lend in call and keep themselves liquid. However, intra-day, call rates are likely to witness come volatility as was witnessed last week. Last week, call rates saw lows of 3 per cent and highs of 4.5 per cent on the reporting Friday.

Along with call, players are also preferring to remain invested in collateralised lending and borrowing instruments of the Clearing Corporation of India.

Repo subscriptions continue to flood the market. In fact after the launch of seven-day repos, subscription used to be around Rs 7000-8000 crore. However the amount has now increased to an average of Rs 10,000-15,000 crore.

This is because once the first cycle of seven-day repos got over for seven days in a row, each of the next seven day repo was countered by maturity of the previous ones.

Treasury bill cut-offs seen low

There are two bill auctions "" 91-day paper for Rs 500 crore for government borrowing and another for Rs 1500 crore for Rs 1500 under MSS. Both are scheduled to be held on April 21.

Going by cut-off rates last week, dealers expect this week's rates to be low. Last week, the cut-off rates on treasury bills were higher by 5 basis points and dealers attribute it to the fact that there has been too much supply in the short term. They feel, this might not be the case this week as the yields are adequately high.

Last week witnessed activity from all segments of the market, specially from foreign institutional investors.

With the outlook on long term interest rates a bit blurred for some time and the equity market headed for a correction, most players traded in treasury bills.