Funds likely to be a tad costly

In comfort zone

Liquidity is expected to remain comfortable this week, albeit the rate at which it is available may inch up rather than remaining below 1 per cent.

According to a money market dealer, the market estimates surplus liquidity at around Rs 40,000 crore, of which Rs 17,000 crore is expected to flow out of the system on account of the 50 basis points hike in the cash reserve ratio (CRR). Inflows from foreign institutional investors (FIIs) will be moderate. However the dollar sales by exporters will add to the liquidity as exporters may resort to sell dollars at every low of the rupee-dollar exchange rate.

There is no major borrowing requirement from the government as well. In fact, the balance under the ways and means maintained with the RBI has come down by Rs 9,859 crore from Rs 30,058 crore to Rs 20,199 crore as on July 27.

This week will witness an inflow of around Rs 1,810 crore as against an estimated outflow of Rs 7,500 crore.

Call rate: Likely to surge

Inter-bank call rates, the interest rate charged by a bank to another for lending funds, is likely to shoot up to the reverse repo rate of 6 per cent. This is because the RBI, in its monetary policy review last week, removed the cap on the amount of liquidity to be sucked out from the market. It had imposed a ceiling of Rs 3,000 crore in March to dissuade market players to park funds with it and channel the flow into the market as liquidity was extremely tight.

Therefore any bank would prefer parking funds with the RBI at 6 per cent rather than lending them in the market below 6 per cent.

T-bills: MFs may invest

The RBI will be auctioning the 182-day and 91-day treasury bills for Rs 1,500 crore and Rs 2,000 crore respectively. The cut-off yield on these papers may inch up a bit since call rates are likely to firm up to 6 per cent after the RBI freely absorbs liquidity from the market. Firming up of call rates is likely to realign other short-term rates in the yield curve, according to a dealer.

G-sec: Demand from banks

The government securities (G-sec) market is expected to remain firm following a buying demand from banks. A part of the demand will be to meet the increased statutory liquidity ratio (SLR) requirement corresponding to the growth of deposits. Traders, on the other hand, will prefer to buy the government papers at low prices when yields are ruling high.

The credit growth is expected to pick up in the third and fourth quarters, which may shift the liquidity deployment from investments to credit. Therefore dealers may prefer to stock up papers now. However, the market outlook will remain bearish after the RBI reflected its concern on the inflation last week. According to the RBI, the inflation excluding energy at 6 per cent is much higher than its forecast of 4-4.5 per cent.

Corporate bonds: New issues afoot

While the Nabard might tap the market to raise around Rs 500-1,000 crore, State Bank of India and Power Finance Corporation would like to wait, said dealers.

Dealers added that buying interest in corporate bonds would depend on the state of liquidity with mutual funds after they face redemption in their liquid schemes this week. The redemption will be due to the pressure on banks to set aside liquidity to face higher CRR requirement.

Rupee: Upward bias seen

The spot rupee is expected to appreciate this week since fresh inflows from portfolio investors are likely. "After the last week's correction, equity markets may rebound with fresh inflows in August. This is because funds are likely to reallocate in the Asian markets after pulling out," said a dealer of a custodian bank.

Another source of forex inflows will be dollar selling by foreign and private sector banks to generate rupee resources. This is because liquidity will be relatively expensive at 6 per cent compared with the below 1 per cent rate at which it was available a week ago.

Forward premia, on the other hand, are likely to firm up since the cost of rupee funds will go up. However, the rise will not be sharp since exporters will sell dollars to realise the proceeds before the rupee appreciates further. Therefore exporters will be selling dollars in the forward market, at least in the near term of one to three months.

In this backdrop, the spot rupee is expected to rule in a wide range of 40.30-40.70 to a dollar.