Crunch to ease on forex inflows

Pressure to ease

The pressure on liquidity is likely to ease this week. Even as the outflow towards advance taxes will take time to come back to the system, the market is expecting the government to start spending.

Moreover, healthy foreign exchange inflows are likely to make way into domestic equity markets. The market is also expecting inflows as part of corporate proceeds of external commercial borrowings and depository receipts. However, this may not happen this week.

Even then the pressure will ease as there are no major outflows slated this week. Liquidity is expected to improve further beginning January, when the government is likely to pay the interest on SDS (special deposit schemes) to the tune of around Rs 10,000 crore.

The intervention exercise of the RBI in buying dollars and infuse rupee liquidity may continue for some time. However, if the crude prices inch up, it may fuel up oil companies' requirement to buy dollars. This could put additional pressure on the rupee.

Call rates To rule firm, may ease later

The interbank call rate is expected to rule firm in the beginning of the week but may ease towards the end. This is because banks are not facing a serious pressure on liquidity this week.

As regards to the sources of funds, foreign exchange inflows into the equity market will help in providing the necessary liquidity. If the forex funds take a backseat, intervention by the RBI is expected to help.

Banks have already stocked up government securities to enter into the repo arrangement with the RBI whereby they borrow liquidity in lieu of the papers. This window has served the market well last week as well.

Treasury bills Cut-off yield may harden

There are two treasury bills to be auctioned this week "� 91-day and 364-day "� for Rs 2,000 crore each. The tightness in liquidity is getting reflected in the short-term interest rate, which in turn may show up in the cut-off yield in treasury bills as well.

However, the cut-off yield may not move up very high, if the strain on liquidity eases compared to last week. The secondary market may continue to witness foreign banks' demand for t-bills but not with the same fervour as seen in the weeks before.

According to market dealers, banks are piling t-bills for their custodian clients, who have been allocated higher limits for their debt market investments. Some of these banks also buy t-bills, as they can maintain a portfolio for entering into the repo arrangement with the RBI for accessing liquidity and maintaining SLR requirement, both at the same time .

Recap: The inflation rate for the week ended December 2 was 5.16 per cent. However, tightness in liquidity led to hardening of the cut-off yield of the 91-day t-bills, which moved up to 7.10 per cent last week from 6.64 per cent in the earlier week.

Corporate bonds To adopt wait and watch policy

Corporate houses may like to take sometime before they decide on raising funds through bonds. This is because the market is expected to witness tight liquidity conditions. These events may have an indirect impact on the interest rate, which is poised to go up.

Therefore, corporates may like to wait till the interest rates stabilise before they decide to raise money from the domestic bond market. However, banks will continue with their fund-raising programmes "� both for interbank regulatory requirements and for financing the credit opportunities. The funds will be dearer as most banks will be vying for the same pie.

The secondary market demand for corporate bonds is also expected to remain lacklustre, as most of the banks are short in funds and the first preference for investments will be government securities. Foreign banks, which have been stocking up corporate bonds "� particularly perpetual bonds floated by the banks, are staying away from the market as the calendar year is drawing to a close.

Recap: The spread between the triple-A corporate paper and government security of corresponding maturity narrowed down to 100-120 basis points (bps) against 125-130 bps earlier.

The banking sector raised around Rs 2,556 crore through certificate of deposits for the fortnight ended November 10, while the corporate sector mobilised only Rs 1,670 crore through commercial papers for the fortnight ended November 30.

Government securities To see thin trade

The g-sec market is expected to remain thin, while the sentiment will be bearish. Banks will be rather busy securing liquidity and the recent hike in cash reserve ratio (CRR) by the RBI is likely to add to the panic. The week ahead will witness outflows towards sale of state development loans to the tune of Rs 1,700 crore. While Rs 18,000 crore has already been collected as advance taxes for excise, customs and services taxes, another Rs 18,000-30,000 crore will go towards advance payment of direct taxes.

Over and above, banks will have to secure funds for credit since the amount of lendable resources has been squeezed through the CRR hike. While it is meant to curtail excessive liquidity in the system as evident from currency in circulation and money supply, it may impact the flow of bank funds into credit. Banks, therefore, will have to set aside funds towards committed loans.

In this scenario, trading in g-sec is likely to remain restricted and need-based. Foreign banks, which are mostly traders in the market, are staying away from the market as the year is drawing to an end. This is because most of them finalise their books for calendar year closing of the parent overseas.

Even as the public sector banks are mostly surplus with funds, each one has a regulatory limit as well as counterparty limit for lending to another bank.

Market players expect that after the prices of government securities fall considerably, banks, provident funds, mutual funds etc may show more buying interest.

In this backdrop, the yield on the ten-year benchmark paper is likely to rule in the range of 7.65-7.80 per cent.

Recap: The market remained rangebound amid lacklustre trading. There was apprehension on account of receding liquidity and auction. The market was more active in managing short-term liquidity. The trading of gilts was mostly for stocking up the papers to be exchanged with the RBI under the repo mechanism to borrow liquidity for next week.

Rupee Poised in a balance

The spot rupee is expected to remain poised in a balance. On one hand, the market is expecting good inflows mostly in the form of portfolio investments from institutional investors. These funds will make way into the Indian equity market.

According to market analysts, major dollar inflows are waiting in the pipeline as part of the corporate proceeds from external commercial borrowings and depository receipts.

Globally, the consumer price and trade balance data released last week were bearish on the dollar. The market has also discounted a bearish tone for the housing and CPI data to be released this week. Therefore, the dollar is likely to have an depreciation bias. Since crosses are going to move up against the dollar, the rupee is also likely to gain few notches.

On the other hand, there is not much demand for dollars from the corporate. However, if oil prices remain volatile and continue rising, demand may go up. If the dollar-rupee levels change either owing to cross-currency impact or the RBI intervention to infuse rupee liquidity, then interbank players may panic and cut their positions.

With the CRR hike, the market is expecting tightness in liquidity. Especially after the advance tax outflows, the rupee premiums to be paid for booking forward dollars are likely to move up. Even as the market will be thinly traded as regards to demand and supply, interbank players may stock up dollars for future by booking them at a forward date.

Just as lendable resources have come down with the CRR hike, rupee interest rate may go up as banks will be reluctant to lend. Therefore, cost of booking rupees for paying dollars is also likely to rule higher.

In this backdrop, the spot rupee is expected to rule in the range of 44.35-44.60 to a dollar.

Recap: The spot rupee remained rangebound during the week. Foreign exchange inflows in the beginning of the week were not much forthcoming since there was a wide-scale correction seen in the equity market. The dollar gained against major cross-currencies as part of global correction.

This is because with the end of the year, most global fund houses are withdrawing from the riskier assets and shifting into fixed income assets, primarily US treasury bonds. Owing to the inflows into the dollar, it appreciated against other currencies. Towards the end of the week, cross-currencies rallied against the dollar and this also brought about a round of appreciation of the rupee to the dollar.

The premiums for forward dollars remained higher owing to apprehension on the state of liquidity. The sharpest hike was witnessed in the near term of one-month tenure.