| LIQUIDITY Not a major worry |
| Net advance tax flows, estimated to be around Rs 10,000 crore, may dent the liquidity situation towards the end of the week. Meanwhile, banks will turn cautious with liquidity. |
| However, liquidity per say is not an issue right now. What bothers the market more is the direction of inflation and interest rates. |
| Even if the Reserve Bank of India (RBI) has gone ahead with the rise in the reverse repo rate much ahead of the quarterly monetary policy review, the market feels that it might effect another rate hike in the policy itself. |
| This will depend on the movement of oil prices and its impact on global inflation. Moreover, the country's inflation is likely to go up gradually with the pass-through effect of the oil price hike. |
| The movement of equity markets is also crucial as it indicates the foreign exchange flows. Bankers feel that the market will continue to decline but gradually since profit taking by both the domestic as well as foreign investors is likely to continue. |
| In this backdrop, the market expects an outflow of Rs 3,500 crore as against an inflow of Rs 1,277 crore. |
| CALL MARKETS Easy rates seen |
| Call money rates are expected to rule easy during the week given the surplus liquidity. |
| However, towards the end of the week they might move up a bit following fund outflow towards the advance tax flows to the government. |
| Meanwhile, the RBI is exploring measures to contain the excess liquidity either by expediting issuance of oil bonds (the bonds which are issued by the government to the oil companies) or preponing the government borrowing programme. |
| These measures are expected to prevent the flow of funds to the equity market which at present is highly volatile, said a banker. |
| TREASURY BILLS Cut-off may firm up |
| The government will auction two treasury bills - 91-day and 182-day - as part of the government borrowing programme and market stabilisation scheme to mop up excess liquidity. |
| While 182-day t-bill absorbs Rs 1,000 crore under MSS, another Rs 500 crore gets sucked out towards the government borrowing. Similarly, Rs 2,000 crore gets soaked up through 91-day t-bill. |
| The cut-off yield at the auctions is likely to firm up with rising interest rates. |
| Recap: The headline inflation came down to 4.68 per cent for the week ended May 27 as against the market expectation of 4.74 per cent. |
| GOVERNMENT SECURITIES To take cue from rate hike |
| The market is all set now with a clear direction in the interest rate which it was awaiting for quite some time. With the reverse repo rate hike, interest rates are likely to harden further. |
| In fact, most of the market players have factored in another rise in the reverse repo rate in the forthcoming quarterly review of the monetary policy in July. |
| Even if liquidity is comfortable, global oil prices and their impact on inflation remain a concern. |
| Since the RBI will be keep a watch on inflation data for deciding on another interest rate hike, it will remain a cause of constant worry for the market as well. |
| In this backdrop the yield on the ten-year paper is likely to rule in the range of 7.75-7.90 per cent. |
| Recap: The market remained bearish on apprehension of rising inflation as a fallout of the domestic oil price hike. There was lacklustre trading with prices moving in a range of 5-10 paise. |
| However, the scene changed with the increase in the reverse repo rate towards end of the week. This led to the yield on the benchmark 7.59 per cent 2016 paper closing at a high of 7.82 per cent which is considered to be five-year high seen last on May 2001, said dealers. |
| CORPORATE BONDS Banks still wary |
| After concluding the issue of State Bank of India, the market is bracing up for the bond issue of ICICI Bank this week. |
| The bank has been borrowing funds through bond market as well as raising bulk deposits through certificate of deposits for meeting a redemption pressure of its high-cost bonds issued by the erstwhile ICICI, said dealers. |
| However, the market is yet to see active trading interest from banks which are shying away from the market following a depreciation in their portfolio during the last financial year. |
| In the meantime, the RBI and Securities and exchange Board of India (Sebi) are putting their act together to revamp the corporate bond market and thus offer an alternative avenue for investment. In this regard, Sebi has mandated BSE to form the trading platform for corporate bonds. |
| Certificate of deposits continue to be the preferred form of instruments for banks to raise money. |
| Recap: The spread between the 5-year triple-A rated corporate bonds and government security has narrowed to 85 basis points with the market gaining activity with trading of oil bonds and tier II bonds by banks. |
| However, trading interest is only seen from insurance companies and pension funds. |
| CURRENCY Equity moves key |
| The spot rupee-dollar exchange rate movement will depend on equity markets and global oil prices. Dealers expect that if the equity markets remain bullish, then foreign exchange inflows will help buoy rupee. |
| The spot rupee may even cross 46 levels to touch 46.15-46.20 if the equity market turns bearish with heavy selling pressure from FIIs and domestic institutions. |
| It is widely expected that the equity markets may remain firm next week but profit taking by both domestic and foreign institutional investors may continue, said a dealer. |
| On the other hand, if the global oil prices become volatile or move up sharply, dollar demand from oil companies will increase. |
| However, volatility in the spot rupee is expected to come down as the cost of holding rupee funds has risen with the recent increase of 25 basis points in the reverse repo rate by the RBI. This is because speculators in the rupee market may prefer to stay away for a while. |
| The premium on forward dollars is likely to inch up following rising cost of rupee funds. This might force importers to rush to cover their payments fearing a further hike in the cost of funds. |
| On the other hand, if the spot rupee depreciates fast, exporters may decide to realise their dollar receivables at least for the near term. |
| Therefore, the spot rupee is pegged in a wide range of 45.80-46.20 against the dollar. |
| Recap: The spot rupee weakened during the week by opening at 45.77 to a dollar and closing at 45.99 . |
| However during the week, it touched an intraday high of 46.13 following the meltdown in the equity market and consequent dollar demand by the foreign institutional investors. |
| Forward premiums on the dollars shot up during the end of the week with rising cost of funds following the reverse repo rate hike. |
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