Call seen volatile; rupee high

Liquidity and dollar movement globally will be crucial for the market; The spot rupee is expected to rule in a wide range of 44.55-45.15 per dollar; The benchmark ten-year paper is expected to hover in the range of 7.38-7.48 per cent.

LIQUIDITY
RBI support seen

Liquidity is likely to improve further this week. The trigger will be greater intervention by the Reserve Bank of India to buy dollars and infuse rupee liquidity.

For the week ended November 17, forex reserves have swollen by $2.07 billion. While part of it is due to foreign exchange inflows into the Indian equity market, rest could be attributed to dollar buying by the RBI.

Market sources added that there has been government expenditure of smaller denominations which may continue next week as well.

Banks will have to prepare for their reserve need for the ensuing fortnight and this will hold the flow of additional funds to the market for sometime.

However, if the RBI refrains from intervention, then the market might witness a tightness. This is because the outflow towards the auction of government securities held on last Friday - November 24 is due on November 27.

However, foreign exchange inflows may take a backseat for the time being since the global markets are heading for portfolio reshuffle from riskier assets to local fixed income markets to the end of the financial year. This week will witness an inflow of around Rs 4,138 crore as against an outflow of Rs 3,500 crore.

CALL
Volatility on cards

The interbank call rates, at which banks lend and borrow from the market, is expected to remain volatile at least in the beginning of the week.

This is because market players are of the view that liquidity condition will be contingent upon the intervention of the RBI. Irrespective of the intervention, it will remain a bit tight in the beginning due to auction outflow and fund management by the banks to prepare for the reporting Friday.

TREASURY BILLS
Benign cut-off likely

Two treasury bills "� 91-day and 182-day papers will be auctioned for Rs 2,000 crore and Rs 1,500 crore, respectively.

The improved liquidity situation has already led to t-bill yields softening last week. Therefore the market could look forward to a benign cut-off yields at the auction of the treasury bills.

The secondary market is likely to witness demand from banks and mutual funds since they require t-bills for maintaining statutory liquidity ratio (SLR) as it does not require provisioning. Provisioning refers to capital requirement to meet contingencies arising in the portfolio from interest rate fluctuation.

Foreign banks, especially may like to stock up t-bills anticipating a good demand from their FII clients. This is because, FIIs will be embarking upon the Indian market with enhanced limits from January.

G-SEC
Upside capped

The market has reached its peak and an upside in price is limited, feel most of the market players. While the ten-year benchmark has already reached 7.43 per cent, 5-year paper has touched 7.29 per cent.

Therefore, even though there are not many negative factors to effect the market this week, the market is of the view that the prices of government securities may not move upwards much. In fact, they feel that a single negative trigger could in fact lead to correction as the market is a bit overheated.

On the domestic front, there are no major outflows from the banking system and backed by statements from the RBI, the market has started perceiving that there would not be any further interest rate hikes in the current financial year.

Globally, the dollar is bearish given weak data from the US. Besides, since the year is approaching towards a close, most of the fund managers are expected to reshuffle investments from riskier assets to safer avenues such as fixed income instruments like bonds.

Therefore, US treasury papers are expected to grow in demand during this period and thus there will be a considerable fall in their yields, market feels. This in turn will be a great boost for the Indian securities market as well, if all other things such as crude oil prices remain rangebound.

For the week, the yield for the ten-year paper is expected to rule in the range of 7.38-7.48 per cent.

CORPORATE BONDS
Slew of issues ahead

Usually, the market is saddled with oversupply and lack of demand. This is quite evident from the sharp increase in the spread between the benchmark ten-year government security and triple-A corporate bond.

Lacklustre trading and buying interest have pushed up the spread to 135-140 basis points from usual 95-100 basis points.

Quite a few new issues are expected to debut this week. Indian Railway Finance corporation (IRFC), Power Finance corporation, food bonds from the Food Corporation of India are likely to raise funds.

PFC proposes to raise around Rs 1,000 crore through 3-year (8.38 per cent) and 10-year (8.78 per cent) bonds. IDBI is in the process of raising Rs 350 crore through lower tier II bonds by offering 8.85 per cent for 10 years.

Despite the supply and pick up in credit demand, not many banks are interested to invest in bonds and help corporates to mobilise funds. This is because for every investment in corporate bonds, the banks will have to value it on a daily basis vis-à-vis the market value.

If it results in a loss, the banks will have to set aside funds as part of provisioning for the losses. Therefore, the secondary market is witnessing demand only from provident funds and insurance companies. There is no demand for trading in these bonds which could have otherwise resulted in the liquidity.

RUPEE
Cross-currency boost

The spot rupee is expected to rule with a bias towards appreciation. This will be mainly on account of cross-currency effect. The dollar is expected to depreciate against major currencies and based on cross-currency effect, the rupee may appreciate.

However, demand for dollars may check the upside. As a part of intervention, the RBI is likely to buy dollars from the market and sell back rupees for enhancing the liquidity in the market.

The intervention may not be as aggressive as it was in the last few weeks. This is because there are not may outflows slated this week to suck out the excess liquidity from the market.

On the other hand, since the month end is approaching, dollar demand may crop up from the oil companies and importers who have near"�term payments queued up.

Forward premiums are likely to rule easy with improved liquidity since cost of buying rupees to book forwards will be less. If the dollar demand goes up substantially, it may impact the cost of booking forward dollars.

Banks, on their part could also push up forward premiums since they would be engaged in booking dollars. This is because the market is expecting a liquidity tightness going forward in the current financial year.

These factors put together are likely to strain forward premiums in the near-term of one-three months. In this backdrop, the spot rupee is expected to rule in the range of 44.55-45.15 to a dollar.