Centre keeps dipping into WMA till

OUTLOOK: Money markets

The Centre continues to utilise the ways and means advances (WMA) window for its funding needs, while foreign exchange inflows took a back seat last week.

For the week ended July 9, the government's WMA withdrawals were lower at Rs 3,629 crore compared with Rs 6,035 crore in the previous week ended July 2.

Though the government has signalled a friendly climate for foreign institutional investors in its Budget, thin foreign inflows are an indication that the investors are waiting for the passing of the Finance Bill by the Parliament.

The offshore non-deliverable forwards market has been sucking out some liquidity of late as some overseas currencies are providing yield differential over the rupee. However, this outflow may be temporary.

For the week ended July 3 the headline inflation rate stood higher at 6.16 per cent compared with 6.09 per cent in the preceding week. The rising inflation and the growing demand for credit are likely to put upward pressure on the domestic interest rates.

Overnight rates to stay low

The cloud of transaction tax and the possibility of rising interest rates will continue to keep the call money rates low. Players are sitting liquid instead of putting money in the bond markets.Therefore the overnight rates are supposed to remain low in the range of 4.25-4.30 per cent this week.

However, the rates might stiffen during the weekend due to the reporting fortnight on Friday. In the medium term, too, the rates might go up as the demand for farm credit is likely to rise sharply.

Four t-bills to be auctioned

There are two sets of treasury bill auctions this week. One set will be of 91-day t-bills to be auctioned for a total of Rs 2,000 crore "" Rs 500 crore towards the government borrowings programme and the rest part of the market stabilisation scheme (MSS).

The other set will be 364-day t-bills for a total of Rs 2,000 crore "" Rs 1000 crore towards government borrowings programme and the rest towards the MSS.

Market participants are of the view that the cut off rates on these treasury bill issues will be in line with market's expectations.

Outstanding government securities issued under the market stabilisation scheme (MSS) stood at Rs 42,500 crore so far in 2004-05 (April-March). Of this, issuances of 91-day treasury bills stood at Rs 22,500 crore, those of 364-day treasury bills were at Rs 6,000 crore and those of government securities were of Rs 14,000 crore.

Trading in the treasury bills market continues to be brisk. Lack of clarity on the transaction tax has many dealers trading only in these short-term money market instruments.

This is because most of the t-bill trades are done through the Reserve Bank of India's negotiated dealing system, which is out of the purview of stock exchanges and hence doesn't attract transaction tax.