Dealers divided over Re in '08

MONEY MARKET ROUND-UP

Both the foreign exchange and government securities markets remained volatile throughout the calendar year, caught between monetary measures of the Reserve Bank of India (RBI) to curb money supply and foreign exchange inflows that were boosting liquidity.

While the market is unanimous that foreign exchange inflows may not be as robust as was seen in 2007, views are divided on the levels seen for the rupee-dollar exchange rate for the first six months of the new calendar year 2008.

Partha Mukherjee, head, treasury, Axis Bank, feels the rupee will rule strong through the year, given the flow of foreign funds to India since the global economy may slow down. In the first six months, the rupee will rule in a range of 39-39.75 even as oil prices remain a concern.

A dealer of a large private sector bank is even enthusiastic of the rupee breaching 39 to touch 38.50 if RBI prefers the rupee to appreciate to make up for a trade deficit of $42 billion and the growing import bill, mostly consisting of oil imports.

However, a senior treasury official of a public sector bank sounded quite bearish as the bank has put a forecast of the rupee at 40 and rising even to 41 in the first six months of 2008 following outflows from the Indian equity market, which at present is highly overvalued.

There are two views as regards the government securities market as well. "The requirement to maintain the surplus SLR above 25 per cent will push the demand for the government securities and the yield on the benchmark ten-year paper may reach 7.60 per cent in the first six month of the calendar year," said K Harihar, head, treasury, Development Credit Bank.

He added that liquidity would cease to be a problem since funds will be a combination of higher private equity flows, foreign direct investment and portfolio investments.

This will be countered by a higher demand for credit. In this scenario, if RBI prefers not to maintain a tight liquidity situation and stops issuing market stabilisation bonds, given the comfortable inflation rate, there will be greater investment in government securities to maintain statutory liquidity ratio since deposit rates are high.

On the other hand, banks will also invest in government securities to arm themselves with enough papers to use as collateral for borrowing funds from RBI. While the beginning of 2007 saw banks maintaining SLR just at the required level of 25 per cent, most of them have now surplus position of 30 per cent. In fact, call rates "" rate at which banks borrow and lend for daily fund requirement "" had reached a high of 80 per cent in March and reached below 0 per cent in June and July, when RBI capped the funds mopped from the market.

Moreover, the market has also discounted a 50 basis points cut in the cash reserve ratio (CRR), if the consumer price index (CPI "" a broadbased measure of inflation) falls below 5 per cent, said a dealer.

However, dealers of PSU bank said that the yield on the benchmark rate of the ten-year maturity might rule in a range of 7.90-8.25 per cent if credit picks up and RBI prefers a tight money situation.

While CRR is the money maintained by banks with RBI as a proportion of deposits mobilised, the SLR is a mandatory investment in government securities.

In 2007, the rupee appreciated by 11 per cent opening at 44.27 to a dollar in January 1, 2007, and closing the year at 39.41/42. The rupee today remained rangebound between 39.41/42 since there was lacklustre demand and supply of funds.

The benchmark ten-year paper closed at 7.79 per cent today since the outlook on liquidity became bullish as RBI infused a net of Rs 3,645 crore into the market as against over Rs 40,000 crore seen last week.

While foreign institutional investment was the major driver of the rupee-dollar exchange rate, the government securities market witnessed successive monetary measures from RBI to curb inflation. This includes a hike in the amount of market stabilisation bonds from Rs 70,000 crore to Rs 2,50,000 crore and an increase in CRR from 6 to 7.5 per cent.