Crude price, Fed view in focus

Fed statement, crude prices and run-up to the policy will remain key factors

The spot rupee is likely to rule in the 46.30-46.70 band against the dollar

The ten-year paper is expected to trade in a wide 8.32-8.37 per cent band

LIQUIDITY
Not a major worry

Rather than liquidity concerns, global interest rate movement and crude prices will keep the markets on toes. Bank of Japan increased its base interest rate by 25 basis points but global markets have heaved a sigh of relief as the bank's statements did not intend a regime of successive increases in the rates.

On the other hand, the US Fed is unlikely to increase its rates in the next Open Market Committee meeting. However, the markets are eagerly awaiting for cues from the statements of the Fed governor in the testimonial address this week. The US inflation data to be released is also important as it will impact the crude prices.

Liquidity will remain in excess this week with an outflow of Rs 4,000 crore as against an inflow of Rs 1,454 crore.

CALL MONEY
Softer rates likely

The interbank call money rates are likely to remain soft with abundant liquidity in the system. The Reserve Bank of India (RBI) absorbs around Rs 40,000-50,000 crore from the system on a daily basis through the sale of government securities "� otherwise known as reverse repo mechanism.

The term-money market, where funds are borrowed and lent for three to five days, is also active under the collateralised lending and borrowing obligation.

Banks and insurance companies lend and borrow money by pledging securities in the market. Even corporates not willing to borrow long-term funds are opting this route in a bid to avoid liquidity mismatches.

T-BILLS
Cut-off to be same

The government will raise Rs 4,000 crore through auction of treasury bills. While Rs 2,000 crore will be raised through 91-day t- bills, comprising part of the government borrowing and bills for excess liquidity absorption under market stabilisation scheme, another Rs 2,000 crore will be borrowed through 182-day t- bills.

The cut-off yield is likely to be remain around the same level as last week due to brisk trading in t-bills.

Recap: The country's wholesale price index figured at 4.94 per cent for the week ended July 1 as against 4.74 per cent last week. Dealers said it pointed to a interest rate rise later in the month.

GOVERNMENT SECURITY
Bearish trend seen

The gilts market is likely to remain bearish. A government security auction announcement is slated for this week. The size and tenure of the papers put for auction is significant for the market, said dealers.

The market is apprehending an increase in reverse repo rate "� the short-term benchmark rate "� and thus the expectations is getting factored into the prices.

As a result of the falling prices, on the other hand, the market is gradually witnessing buying demand from banks and mutual funds which is likely to continue this week as well. Crude prices, currently at above $77 per barrel, may play spoilsport.

The ten-year benchmark, thus, is expected to rule in the 8.32- 8.37 per cent range.

Recap: The yield on the ten-year paper has gone up to 8.36 per cent following a devolvement of government securities with primary dealers.

For the benchmark 10-year 7.59 per cent 2016 paper, the RBI had accepted only 20 bids for only Rs 1,590 crore as against the notified amount of Rs 5,000 crore. The cut-off yield was, however, 8.29 per cent as against the market expectation of 8.32-8.34 per cent.

CORPORATE BONDS
Bank floats on cards

Syndicate Bank and UTI Bank are in the process of raising funds from the corporate bond market through tier II bonds. Others in the fray include Vijaya Bank and Bank of India.

Power Grid Corporation will be one of the few PSU undertakings that is likely to come out with a bond issue as well. As credit growth slows down with rising interest rates, banks are once again turning to corporate bonds for investments.

Therefore, the market is witnessing buying demand from banks and mutual funds for corporate bonds which are available at low prices following considerable increase in yields.

While corporates are keeping away from commercial papers due to rising rates, banks continue to raise bulk deposits at higher rates in the form of certificate of deposits. Corporates are, instead, encashing their investments in liquid schemes of mutual funds to raise funds.

Recap: The spread between the 10-year triple-A corporate bond and government security has widened to 75 basis points.

During the fortnight ended June 30, as many as 2,326 commercial papers were issued amounting to Rs 19,490 crore. Similarly, banks raised around Rs 53,863 crore through 5,591 certificate of deposits as on June 9.

RUPEE
$ demand may rise

The spot rupee is under pressure on account of spiralling oil prices. With the crude touching $78 per barrel, demand from oil companies could push up dollar demand.

The US inflation data and the testimonial address of the Federal reserve governor are expected this week. The stance of the dollars will much depend on the tone of the statement which, the market feels could provide some cues to judge whether or not there would be another rate hike in the US.

However, market observers are of the view that owing to high oil prices, inflation will firm up which, in turn, may fuel expectations of another interest rate hike in the US.

If this happens, players globally would like to stock up dollars to avoid a high holding cost later. This might make the dollar appreciate to other currencies.

Meanwhile, even if the Bank of Japan has increased the interest rate, the monetary authorities are unlikely to pursue a continuous upsurge in the interest rates.

Forward premiums are likely to remain firm as slowly and steadily the market is factoring in another 25 basis points increase in reverse repo in the forthcoming policy.

Further, dollar demand in the spot market may also put a strain on the he availability of dollars. The market does not expect a robust inflow of foreign exchange this week either.

In this backdrop, the spot rupee is expected to rule in a wide range of 46.30-46.70 this week.

Recap: The spot rupee remained volatile during the week by reaching the psychological level of 46.50 during the end of the week. However, the RBI's intervention through dollar sales brought it up to close at 46.36 against the dollar.

Encashing low levels of the spot rupee, exporters sold forward dollars which helped them to close lower. The six-month and one-year forwards closed at 1 per cent and 1.14 per cent as against levels of 1.10 per cent and 1.20 per cent earlier.