Funds in comfort zone; rupee may decline

WEEKLY MONEY & CURRENCIES

Liquidity is expected to remain comfortable even if the market is poised for an outflow of around Rs 30,000 crore. Since the Reserve Bank of India (RBI) has been accepting liquidity to the tune of Rs 50,000 crore, liquidity in the system is expected to remain in surplus.

Further intervention by the RBI to purchase dollars is expected to augment the rupee liquidity. The inflows into the domestic market are not only portfolio investments into the equity market, but also comprise direct investment, company proceeds of external commercial borrowings and export receivables. However, inflows may not be as high as the last week's, says a dealer.

The rupee liquidity generated through the purchase of dollars will, however, depend on the extent of excess funds left after the RBI mop-up of surplus liquidity through issuance of bonds and bills under the Market Stabilisation Scheme (MSS).

Dealers said that while the system was flush with the rupee liquidity, it was dollar-deficient. Following the intervention, the RBI is flush with dollars and not the banks. Therefore, the market may witness increased swapping of rupees into rupees.

Call rates: May rise
Call rates are expected to rule comfortable this week, given the likelihood of ample liquidity in the system. As the auction of government papers for market borrowings and MSS nears, call rates may inch up a bit since banks will be cautious in lending.

Dealers said liquidity was to be seen in other markets as well since non-banking players lent in the collateralised lending and borrowing market ( CLBO) against the collateral of securities. These include mutual funds and life insurance companies.

Treasury bills: Yields seen up
The RBI will auction the 91-day and 364-day treasury bills for notified amounts of Rs 3,500 crore (Rs 3,000 crore for MSS) and Rs 3,000 crore ( Rs 2,000 crore for MSS) respectively. The cut-off yield on the T-bills is expected to inch up a bit since the segment is burdened with excess supply.

Similarly, in the secondary market, the demand for treasury bills is likely to be moderate. Even if there is a demand for SLR requirement, it gets offset by oversupply.

Corporate bonds: Issues on hold
In the primary market, Syndicate Bank, Punjab National Bank, Bank of Baroda, Canara Bank, among others have put on hold their long-term borrowing plans. Market players are waiting for cues from the October credit policy for taking a decision on rates, says a dealer.

In the short-term segment, banks will continue to raise funds through certificates of deposit (CDs). The associate banks of State Bank of India will be seen in the market.

Rupee: May slip
The non-farm payroll data in the US have been optimistic, with the payroll going up by 1,10,000 as against an expectation of 1,00,000. Following this, the euro slid against the dollar at 1.4041/1.4197 as against 1.4038 last week.

The Japanese yen also fell against the dollar to 117.18 compared with 116.24 during the same period. Therefore, on a cross-currency effect, the rupee may lose temporarily to the dollar.

In this backdrop, the spot rupee is expected to rule in the range of 39.30-39.80 to a dollar.

Some traders also expect the equity market to go into a correction mode, halting fresh inflows into the equity market. However, at every downside of the rupee-dollar exchange rate, exporters and companies will be seen selling dollars.

Even non-deliverable forward markets (NDF), the overseas market, where derivatives are dealt on the underlying of the spot rupee exchange rate, is a factor to reckon with. Investors are buying cheap dollars in the NDF and selling them in the forward market for one month and earning 5-7 paise arbitrage.

The premium on the forward dollars may continue to dip since the large-scale selling of dollars is expected both from banks and corporates in the forward market. While corporates are trying to protect their receivables, foreign banks especially prefer to remain liquid in dollars.

Recap: Backed by a cross-currency appreciation against the dollar and forex inflows, the spot rupee continued to appreciate against the dollar. It reached a new nine-year high of 39.3650 and even was dealt at 39.25 to a dollar. However, there was support through the RBI intervention to protect the spot rupee at 39.49/50 to a dollar.

Post-script: The government enhanced the MSS ceiling from Rs 1,50,000 crore to Rs 2,00,000 crore.