| LIQUIDITY T-bill auction to suck out liquidity |
| Liquidity in the banking system remains comfortable. The Reserve Bank of India (RBI) by raising the notified amount of 91-day t-bill under the market stabilisation scheme (MSS) for forthcoming five successive weeks from Rs 1,500 crore to Rs 3,500 crore will suck out an excess of Rs 7,500 crore from the system in addition to the scheduled Rs 10,000 crore. |
| This week will witness an outflow of Rs 6,000 crore to Rs 4,000 crore in 91-day t-bill and Rs 2,000 crore in 364-day t-bills auction. |
| The outflow may increase if the government announces the borrowing programme to raise Rs 8,000 crore as per the schedule of the auction. |
| Inflation rate will continue to remain moderate in line with prices of other commodities even as oil remains a concern. |
| Foreign institutional inflows, which started slowing down last week, may rejuvenate this week with outlook on Asian markets gaining renewed vigour with fresh rumours of the yuan revaluation. |
| Overnights to stay soft |
| Call rates will continue to rule soft this week as well. Even if the notified amount of the 91-day t-bill auction has been raised, there is enough liquidity in the system, said dealers. |
| The additional liquidity is getting generated as part of intervention activity of the RBI to prevent the rupee appreciation and the government expenditure. |
| RBI alters auction dynamics |
| The RBI has revised the indicative calendar for the market stabilisation scheme to suck out excess liquidity in the system. Besides government expenditure and foreign institutional inflows, another factor that is adding to the liquidity is the maturity of various instruments where State Bank of India (SBI) had deployed its funds in 2000. |
| The funds had been raised through the issuance of Indian millennium bonds. Henceforth, 91-day t-bills will be issued for Rs 500 crore towards the government borrowing programme and Rs 3,500 crore under MSS. It will be accompanied by 364-day t-bill, which will be auctioned for Rs 2,000 crore and Rs 1,000 crore each for MSS and government borrowing, respectively. |
| Recap: Brisk trading and aggressive bidding by SBI in the 91-day t-bill auction has led to fall in the yields of 91-day t-bill from 5.20 per cent to 5.14 per cent. Inflation rate for the week ended August 13 fell further to a new low of 3.13 per cent from 3.35 per cent a week ago mainly owing to cheaper iron ore, manufactured and essential non-food items. |
| CORPORATE BONDS Oil companies seen active |
| Indian Oil Corporation may enter the market to raise Rs 1,000 crore. In the secondary market, oil companies have been selling oil bonds to raise funds. |
| While Hindustan Petroleum has already sold Rs 300 crore worth of oil bonds, Bharat Petroleum may place some orders this week, said bond dealers. |
| Lack of floating stock in bonds in the market has led to lacklustre trading in the market as well. The secondary market operations in the bonds are mostly routed through bilateral deals between corporate and banks. |
| Along with commercial papers, the market is also witnessing a large issuance of mibor-linked non¿convertible debenture (NCDs) by the corporate. |
| This is because NCDs with rates linked to mibor, the corporate enjoys a floating rate option while in CPs, the interest rate is fixed. Besides, in NCDs, the product has in-built daily call and put option. In case the rates move up, NCDs could be called back from the investor and paid of to avoid paying higher rate of interest or vice versa. |
| Recap: The corporate bond market remained dull with the spread between the five-year AAA bond and underlying government security at 40 basis points. Corporates issued 2156 CPs amounting to Rs 19,227 crore at rate ranging from 5.50 to 7.50 per cent for the fortnight ended August 15. |
| GOVERNMENT SECURITIES T-bill cut-offs to guide sentiment |
| Liquidity and moderation in inflation rate remain positive triggers for the market. On the other hand, hike in the notified amount of 91-day treasury from Rs 1,500 crore to Rs 3,500 and apprehension on the announcement of auction for Rs 8,000 crore will counterbalance the positive triggers. |
| The outflow from the market is not a concern as the liquidity in the market is much in excess. What is worrying is the cut-off yield at which the auction will get cleared, which in turn will indicate the market appetite for the government papers. 'This will have an impact on the secondary market trading,' said a primary dealer. |
| Recap: The prices of government securities remained range-bound for most part of the week. The sentiment in the market got perked up towards the end of the week following the rumours of the yuan revaluation. |
| According to dealers, the moderation in the rate of inflation has played an important role. This is because, the overall index has come down, and the fall in inflation is not only on account of base effect. |
| RUPEE Yuan buzz to alter Rupee outlook |
| The market outlook on the spot rupee has suddenly taken a bullish turn with fresh rumours of the yuan revaluation. Besides Chinese yuan, another decisive factor for the dollar movement, which in turn might impact the rupee is the Japanese elections, said Pawan Bajaj, chief dealer, Bank of India. |
| According to him, the present prime minister has been following a policy of buying yen and, thus, depreciating the dollar for reducing the overall dollarised value of the deficit. |
| Thus, the election will give a direction towards Japan's policy towards the dollar, which in turn will impact the rupee movement as well. OIl prices remain a negative trigger for the rupee to depreciate. |
| Meanwhile, the slowdown in foreign institutional investors' inflows may continue if the equity market correction continues. This might pick up if the rupee strongly appreciates following the yuan movement. In this backdrop, the spot rupee is expected to rule in the range of 43.55-75 to a dollar. |
| Pressure on premiums to ease |
| The pressure on the premium on the forward dollars will ease following the appreciation binge of the rupee in sync with another round of yuan revaluation rumours. |
| Explaining this, dealers said, with every tick of appreciation in the spot rupee, exporters may come forward to sell the dollars, whereas importers will remain fence sitters. Even if importers opt for covering their import payments, it will be for the near term of one to three months. |
| Recap: The spot rupee depreciated to a 14-week low of 43.78 to a dollar in the beginning of week owing to importer demand and dollar strengthening. However, fresh rumours of the yuan revaluation saw the rupee gain to close the week at 43.66 to a dollar. |
| Similarly, forward premiums moved in tandem with the rupee. |
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