The market is still grappling with a liquidity crunch. Dealers said the gilt market almost paused last week ahead of the likely auction of Rs 5,000 crore 10-14 year gilt. |
The auction, scheduled before February 22, has made the market edgy. The cash-strapped system, just over a week back, had managed to absorb a twin auction that sucked out Rs 6,000 crore. |
The market is uncertain whether the government will go ahead with the auction, despite finance minister P Chidambaram last week scotching market talk of a cancellation. |
A total of Rs 3,553 crore will flow into the system on account of interest payments on government securities. But the liquidity squeeze is much more severe amid rapid growth in bank credit. |
Last week, the RBI had to inject an average of Rs 16,822 crore daily into the system through repo (repurchase) window under the liquidity adjustment facility. |
Meanwhile, the amount sucked out remained negligible. The average bid received at the reverse repo window was just Rs 342 crore. |
Though treasury bill auctions under the market stabilisation scheme remain suspended because of the liquidity crunch, the RBI has announced auction of two treasury bills this Wednesday for Rs 1,000 crore. |
GILTS MARKET Yields seen higher |
If the government goes through with its scheduled borrowing this week, further upward pressure on yields is certain to build up, traders said. |
The yield on the benchmark 10-year government paper would end this week in the 7.45-7.50 per cent range if the government decides not to defer the auction. Otherwise, the benchmark yield would end between 7.35 per cent and 7.40 per cent. |
Several banks are expected to sell gilts to generate liquidity to support credit demand. The demand for gilts will come only from banks which have statutory liquidity ratio holdings close to the minimum 25 per cent. |
Deposits of banks increased by Rs 23,241 crore in the fortnight ended February 3, while the amount invested in gilts totalled Rs 8,874 crore during the period. |
Recap: The market shrugged the lower-than-expected rise in inflation in the week ended February 4, ahead of the scheduled auction. The yield on the 10-year paper at the end of the week was 7.34 per cent. The yield moved in the 7.31 per cent to 7.36 per cent range the whole of last week. |
CALL RATES May dip below 7% |
The overnight call money rates are expected to remain under 7 per cent this week. They have been ruling high for a long time because of the prevailing liquidity crunch. |
The rates were at 3-1/2 year highs of over 8 per cent till a few of weeks ago. However, 7 per cent would still be in the higher bracket as it normally closes at 5.5 per cent. |
Recap: Call rates last week ended at 6.90-7 per cent levels. They had touched a low of 6.75/85 per cent on Friday, drawing comfort from liquidity inflows on dollar buying by the central bank. |
INFLATION Lower-than-expected |
The wholesale price index rose by 4.08 per cent in the week ended February 4. It was lower than the previous week's 4.30 per cent. The expectations, in fact, were of an increase in inflation. |
CORPORATE BONDS Tier-II issues save day |
The corporate bond market is likely to continue to remain dull. Rising interest rates and tight liquidity are weighing heavily on the market. |
The only players continue to be banks, which are raising Tier II capital. The latest entrant is Allahabad Bank with a Rs 500 crore Tier II bond issue. |
The yield differential between a five-year AAA corporate bond and similar maturity government paper slightly narrowed last week to 71.74 basis points from 72.73 basis points in the previous week. |
CURRENCY Pressure on Re likely |
Dealers expect the rupee to remain under pressure this week as the dollar is seen gaining on US Federal Reserve chairman Ben Bernanke's statement that further interest rate hikes would be necessary to contain heightened inflation pressures. |
Dealers said fear of FII inflows slowing on rising US rates is also a concern. |
Some dealers, however, differed. They said robust FII inflows into the equity market would continue irrespective of the rate scenario in the US. |
They feel volatility in the market provides opportunity for FIIs to earn much higher returns. |
Dealers don't expect the rupee to depreciate below Rs 44.60 as the RBI would not be comfortable with a sharp fall. The rupee fell by 20 paise against the dollar last week. |
The dollar is also expected to gain as core production prices for January in the US were stronger than expected, which strengthens hopes that the Federal Reserve would keep increasing rates to check inflation. |
Another downside for the rupee would be the weakening of the yen. Dealers agree that losses in the yen, however, could be limited following Bank of Japan deputy governor Kazumasa Iwata's comments of an ease-up in deflation-fighting policy. |
On the back of Bernanke's comments last week, expectations of US interest rates rising further are stronger. The US Federal Open Markets Committee is seen increasing its target rate to 4.75 per cent at the end of its two-day meeting beginning March 27. A similar decision is expected at its next meeting in May. |
The US Federal Reserve has increased its benchmark rate 14 times since June 2004, to 4.5 per cent. The European Central Bank raised its key rate in December for the first time in five years to 2.25 per cent. |
The gap between two-year US treasuries and Japanese paper touched 4.25 percentage points last week, which is close to a six-year high. |
Recap: The rupee fell to one-month low against the dollar last week. It fell to Rs 44.46/47 per dollar on Friday from Rs 44.26/27 on Monday. The rupee had touched a low of Rs 44.49 on Friday. |
FII investments in equities have been strong. Net purchases in 2006 have totalled about $1.6 billion. |
The yen weakened to 118.06 per dollar on Friday from 117.58 the previous day. It fell to 140.95 per euro, from 139.99. The yen fell 13 per cent against the dollar in 2005 as the Bank of Japan held interest rates at zero per cent. |