| Liquidity is also abundant in dollar terms since most of the exporters are busy selling dollars fearing a fast appreciation in the rupee. Apart from the demand from oil companies, other importers do not access the market during the month. |
| Banks are also through with their need on the closure of the financial year, thus there will not be additional pressure on liquidity. However, if the RBI announces measures to absorb liquidity in the form of either a hike in cash reserve ratio (CRR) or additional bond issues under the MSS, the entire scenario on liquidity may change leading to a tightness. |
| The anxiety over CRR hike is quite rife this week given the abundance of liquidity. The RBI on an average has been receiving bids worth Rs 20,000-30,000 crore from the market even as the absorption is capped at Rs 3,000 crore. |
| The market will absorb around Rs 6,000-9,500 crore towards MSS bonds and Rs 3,500 towards t-bill auction as against inflows of around Rs 2,925 crore. |
| CALL RATES Overnights to stabilise at 4-5% |
| Call rate is expected to stabilise around 4-5 per cent since the liquidity is expected to remain comfortable. |
| The rates may firm up after the auction outflows for a short period but eventually will improve, said dealers. However, if the RBI announces additional measures to curb liquidity, the call rates may spike to earlier levels of 8-10 per cent. |
| TREASURY BILLS Auction to raise Rs 3,500 cr |
| The RBI will auction the 91-day and 182-day t-bills in the market to raise a total of Rs 3,500 crore, both as part of government borrowing programme and liquidity absorption to tackle inflation under MSS. |
| The cut-off yield for the t-bills is likely to remain easy compared with last week following adequate liquidity. |
| Since the interest rates have been fluctuating and are ruling high, players prefer to buy treasury bills since these are short term and the portfolio does not get affected by the market fluctuations in interest rates. |
| Recap: Call rates fell to a low of 1-2 per cent following heavy government expenditure and infusion of rupee liquidity in the market after the RBI absorbed dollar from the market. The RBI absorbed around Rs 25,000-30,000 crore from the market towards the end of the week. |
| GOVT SECURITIES In bearish mode |
| The market is bearish even if the liquidity is comfortable. There is a fear among market players that the liquidity is not sustainable. The RBI may come out with either another hike in CRR or additional issues of bonds to absorb the excess liquidity to meet the inflation target of 4-4.5 per cent. |
| The market is also of the view that the demand for government securities to meet SLR requirement is very less with the financial year coming to an end. The cut-off yield announced by the RBI for the ten-year benchmark paper 7.49 per cent 2017 at 8.31 per cent has also added to the bearishness since it reflects a lack of demand for government securities. |
| In this backdrop, the yield on the ten-year benchmark paper is likely to rule in a wide range of 8.10-8.20 per cent, depending on the liquidity conditions. If there is any hike in CRR or liquidity absorption measures, the ten-year paper may reach to a high of 8.30 per cent. |
| Recap: The market remained rangebound since liquidity continued to remain tight . The yield on the ten year paper moved up to 8.11 per cent but mellowed down to close at a low of 8.06 per cent during the week. |
| CORPORATE BONDS PFC issue opens |
| Power Finance Corporation is negotiating in the market to raise Rs 500 crore for 10 years. Instead of offering coupons to the subscribers, the company is entering into a swap. It has asked for bids. |
| The banks will be quoting a spread on the one year gilt and the company will receive funds at the lowest bid and at a floating rate of interest. |
| The company will pay a fixed coupon of 9.96 per cent. Besides, the State Bank's subsidiaries are also planning tier II bonds. But no one has firmed up plans since the interest rate is yet to stabilise. If the RBI raises CRR or auctions additional MSS bonds to suck out liquidity, there might be a spurt in raising funds through certificate of deposits (CDs). |
| Recap: The spread between the 10-year government security and triple A corporate bond of similar maturity ruled at around 150-160 basis points. The secondary market for the bonds remained illiquid, barring the demand from provident funds and insurance companies. |
| RUPEE Strong $ likely |
| The spot rupee may decline this week, since the demand from oil companies is fast catching up. According to dealers, the oil companies want to finish off their borrowing requirements before the spot rupee bounces back to the earlier lows of 43-44. |
| In addition, the foreign institutional investors may like to stay away from the markets or book profits since the market looks overpriced, feel dealers. |
| Therefore, there might not be any additional inflows into the market. The RBI is also expected to continue to intervene actively now that the inflation has come down below 6 per cent. |
| The dollar has been ruling strong overseas and this will put an additional pressure on the rupee. Supplies from corporate inflows are also expected, but these will be countered by the RBI's intervention. |
| The premia on the forward dollars, on the other hand, may remain easy since liquidity is likely to remain comfortable for some time. |
| However there might be additional pressure on the forward dollars, if the demand for dollars from the oil companies exceeds supply. In this backdrop, the spot rupee is expected to rule in the range of 41- 41.50 to a dollar. |
| Recap: The spot rupee depreciated to a low of 41.45 during the day following the heavy sale of dollars by exporters and intervention by the RBI. |
| On the contrary, the annualised premium for forward dollars eased with softening liquidity in the market. |
| Post Script: The interbank call rates fell to a low of 1 per cent during the week, following easy liquidity. |
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