Auctions, advance tax likely to tighten liquidity

WEEKLY MONEY & CURRENCIES

Liquidity and the RBI intervention in the forex market hold key to the market.

The yield on the ten-year benchmark paper is expected to rule in the range of 8.10-8.25 per cent

The spot rupee is likely to move in the wide band of 40.75-41.35 to a dollar

LIQUIDITY
May tighten

Liquidity may tighten this week following outflows towards the government's borrowing programme. The government, which maintained a surplus cash balance till the first week of April in the current financial year, has been using the overdraft facility for the first time since 2003. The government has borrowed Rs 20,000 crore under the ways and means advances and Rs 12,000 crore as overdraft.

Besides, there will be outflows towards advance taxes on June 15. Banks have started setting aside funds to maintain the reserve requirements for the fortnight beginning on Monday (June 11).

Dollar inflows may also not add to the excess liquidity as there may be outflows following profit-booking in the equity market, according to a dealer.

This week will witness an inflow of around Rs 1,501 crore as against an estimated outflow of Rs 22,000 crore. Advance tax outflow is slated to begin on Monday.

CALL
Likely to rise

The call rates may inch up to rule around 4-5 per cent. This follows the total outflow of around Rs 40,000- 45,000 crore from the system, including auctions and advance taxes. Even if the advance taxes are slated for June 15, the banks will be setting aside funds during the week, which would reflect on the market, thus pushing up the rates.

TREASURY BILLS
Slew of auctions

The RBI on Monday will issue 91-day and 182-day T-bills for Rs 3,000 crore and Rs 2,000 crore, respectively, followed by another auction of the same T-bills, 91-day and 182-day, for Rs 5,000 crore each on Wednesday.

The T-bills will be auctioned only to fund the government expenditure and not towards liquidity absorption exercise of the RBI.

The cut-off yield in both 91-day and 364-day T-bill is likely to be higher than the market yields, reflecting the sentiment that has been bearish with these announcements.

There has been brisk demand for T-bills from foreign institutional investors (FIIs). The market is looking forward to such issuance for SLR requirement as it is needed for valuation and is hence insulated from interest rate fluctuations.

Recap: The call rates consistently remained below the RBI funding rate of 7.75 per cent and eventually fell below 1 per cent during the weekend due to surfeit of liquidity in the system. The cut-off yield on the 91-day T-bill figured below 7.50 per cent at 7.23 per cent at the last week's auction.

GOVT SECURITIES
Good demand

The RBI has announced an enhanced amount of bonds and treasury bills only under the government's borrowing programme. It will be auctioning 7.49 per cent 2017 in two tranches "" for Rs 5,000 crore on Tuesday and for Rs 6,000 crore on Friday.

This borrowing programme is expected to fund the government expenditure since it is running an overdraft since the last week. The government's borrowings from the RBI now figures at Rs 32,000 crore.

The trading in government securities is expected to be cautious as the market will be assessing the liquidity conditions during the entire week.

Otherwise there is good demand from banks to buy government securities for SLR requirements. Banks have to buy them from the market as the RBI has capped its capacity to absorb funds from the market at Rs 3,000 crore and give securities to the banks in return.

In this backdrop, the yield in the ten-year benchmark paper is likely to rule in the range of 8.10-8.25 per cent.

Recap: There was brisk buying of government securities to meet the SLR requirement by banks as the market had discounted the monetary measures from the RBI. However, during the weekend, the yield on the ten-year benchmark paper shot up to 8.20 per cent following a sharp rise in yields on US bonds.

CORPORATE BONDS
Awaiting June 15

Not many issuers are expected to foray into the market for raising funds. Most of the public sector undertakings would like to wait till June 15 till the liquidity situation clears out since it could impact the interest rates at least in the short term.

However, some banks are likely to come to the market with lower tier-II issues to raise funds. UBI and Vijaya Bank may raise Rs 500 crore each with 10-year lower tier-II bonds.

In the medium term, the bond market may get to see more issuers for raising funds following the clampdown on the ECB route and ban on corporates to raise funds through bonds that are not completely convertible into equity, primarily partially convertible bonds or optionally convertible bonds.

The secondary market may not see much interest from mutual funds like the last week since most of the institutional players such as banks would like to withdraw money from mutual funds to pay advance taxes and meet reserve requirements in the coming fortnight.

Recap: The spread between the 10-year government security and the triple-A corporate bond of similar maturity continued to rule around 150-160 basis points. Excess liquidity has pushed down the rates on the one year CDs to 9.50-9.65 per cent from a high of 10.25-10.50 per cent seen a few weeks ago.

RUPEE
May head south

The spot rupee is likely to rule with a bias towards depreciation. The global dollar movement will be of foremost significance. The dollar has gained substantially after 41 per cent of respondents in a survey indicated no further policy rate cuts. It is expected to gain further in the coming weeks, thus putting pressure on the rupee.

The equity market is likely to witness bouts of profit-booking, which could result in dollar outflows as was seen last week.

Even if the rupee gets to appreciate following dollar inflows through the IPO proceeds of DLF and ICICI, the RBI is likely to hit back with aggressive purchase of dollars.

There is a strong likelihood of intervention from the RBI since the inflation has figured below 5 per cent. Even if it could not absorb the excess liquidity generated due to purchase of dollars from the market, it need not worry for money supply, at least in the short term.

There are already measures taken through sale of bonds and bills to absorb excess liquidity.

Forward premia, on the other hand, may firm up since the excess liquidity is likely to get absorbed following an outflow of Rs 22,000 crore through the auction of government securities and treasury bills and an additional Rs 25,000 crore through advance taxes.

In this backdrop, the spot rupee is expected to rule in the wide range of 40.75-41.35 to a dollar.

Recap: he spot rupee breached 41 on the downside to reach a low of 41.11/12 on Friday following heavy outflow of dollars under the portfolio route. This was triggered by an aggressive intervention from the RBI in the forex market to depreciate the rupee, which offered lucrative levels to the investors to repatriate.

Forward premia on dollars came off substantially following comfortable liquidity.

Post-Script
The government has resorted to the overdraft facility for the first time since 2003 and the RBI will auction Rs 20,000 crore worth bonds only to facilitate the government's borrowing.