Divestment inflows add to funds glut

OUTLOOK/Money Markets

Liquidity seems to be no longer an issue for the bond market. The markets last week rallied as players built up positions expecting inflation to fall to around 5.71 per cent.

Dealers said the higher headline number at around 5.84 per cent may be due to base effect reasons, and because prices of primary articles continue to be high.

While repo as an instrument has come in handy instrument for the Reserve Bank of India (RBI) for market management, the subscription to repo auctions is signalling the copious cash in the system.

Market stabilisation bonds remain another trigger this week. Participants are of the view that with third week of March set to witness redemptions of around Rs 12,000 crore, the RBI might come up with a market stabilisation float.

According to dealers, with no buying demand to be found, repo rate seems to be most attractive rate for parking funds.

In fact, banks are engaged in repos between themselves and other non-banking players.

The interbank overnight repo rates hover around 2.50 per cent compared with 4.5 per cent offered through the RBI auctions. Meantime, this week's inflow stands at Rs 2,946.53 crore, while outflow is at Rs 500 crore towards a treasury bill auction.

In the coming months, liquidity is likely to abundant as forex inflows are set to increase on many accounts. Corporates are set to bring in their overseas borrowing proceeds that were raised through the external commercial borrowing (ECB) route.

Moreover, foreign institutional investor (FII) inflows are likely to go up substantially as they have been major players in the ongoing public disinvestment campaign.

Soft run in call money to continue

Interbank call money rates are expected to continue ruling soft as there is a liquidity overhang in the system with forex inflows expected to pick up following ECB proceeds coming in, apart from FII inflows.

Liquidity in the system is burgeoning as the RBI continues to sterlise forex inflows by inducing the rupees. But besides repos, there are not enough securities with the RBI to absorb the cash floating.

With international rates firming up, if capital flight occurs, there could be some strain on funds in the medium-term.

Structurally, call rate is ceasing to be the only tool for managing day to day liquidity in the system as the entire market is looking forward to the repo system.

Treasury bills

There is one treasury bill auction slated for this week"" Rs 500 crore towards the 91-day paper.

The cut-off rates are expected to be extremely competitive going by the market yield of the bills.

Last week, treasury bill interest rates came down marginally and going by the current rates, the RBI is likely to announce a lower cut-off rate for the 91-day paper.

In fact, treasury bills have been viewed as one of the attractive options from the arbitrage point of view with forward premiums ruling below one per cent for the one year period.

Dealers seem to be quite enthusiastic about trading in treasury bills.

They feel there is more scope for an interest rate fall in the short end of the maturity scale.