Liquidity crunch to continue

Yield on the 10-year paper will move in a range of 7.35 per cent to 7.40 per cent in a cash tight market; The rupee will trade in the 44.10-44.25 per dollar band; Call rates are likely to move between 6.50 per cent and 7.25 per cent.

LIQUIDITY
Tightness stays

Liquidity continues to be an issue with the banking system. Market participants are still wary about whether the government would go ahead with the next auction scheduled between February 14-21.

Banks currently derive support of around Rs 18,000-Rs 19,000 crore daily from the Reserve Bank of India (RBI) through the liquidity adjustment facility (LAF) windows.

The central bank has announced auction of the 91-day and 364-day treasury bills for a notified amount of Rs 500 crore and Rs 1,000 crore under the regular auction calendar. The auctions under the market stabilisation scheme (MSS) remain suspended.

According to debt market analysts, until the daily amount of capital infusion through the repo window comes down, the outlook for the bond market is expected to remain range-bound with a downward bias.

CALL RATES
Pressure still on

The inter-bank overnight call money rates are likely to trade in a range of 6.50-7.25 per cent levels this week. On account of the reporting Friday, the system is expected to see some respite.

However, the pressure on the system will continue, say dealers. The money market's comfort factor is the infusion of liquidity on account of purchases of FII dollar inflows by RBI.

Recap: Call rates closed at 7.00-7.25 per cent on Monday last and fell to 6.90-7.10 per cent on Saturday. The central bank did not receive any bids at its morning reverse repo window.

Overnight inter-bank rates have eased to over 7 per cent from three-and-a-half-year highs of eight per cent two weeks ago after central bank intervention in the foreign exchange market, which involves selling rupees and buying dollars, increased rupee funds with banks.

INFLATION
Unlikely to cross 5%

The widely tracked wholesale price inflation rate rose to 4.30 per cent on an annual basis in the week ended January 28, lower than the previous week's level of 4.51 per cent.

According to market analysts, this is far lower than expected. The headline inflation is not expected to cross five per cent by the end of March 2006.

CORPORATE BONDS
Volumes to dip further

Participants are keeping a sharp eye on where the liquidity and yields are headed. However, traders said most of the issuers are currently keeping away from the market and going ahead, volumes are expected to dip further. The current spread on a five year AAA-rated corporate bond stands at 72.73 basis points.

The issues currently open include Tier-II issues by UCO Bank, State Bank of Travancore and ICICI Bank and non-convertible debenture issue of Punjab Finance Corporation.

The issues which closed in the recent past include non-convertible debenture issues of Bank of Maharashtra, State Bank of Patiala and the Export-Import Bank of India.

GOVERNMENT SECURITIES
Dull week ahead

The government securities market is expected to remain lacklustre till the banking system recovers from the prolonged cash squeeze, dealers said. Yield on 10-year benchmark paper is expected to trade in a range of 7.35 per cent to 7.40 per cent.

Given the tight liquidity in the market, banks would not prefer to hold excess SLR holdings. Only banks, which need to maintain their reserve requirements, would be seen in the market, said a treasury dealer.

This can be inferred by the fact that volumes in the gilt market have been shrinking by the day. At present, the volumes are around Rs 1,000 crore compared with the normal daily volume of Rs 3,000 to Rs 4,000 crore.

The gilt market is also conscious of another auction, which is slated to hit the market this week. This only implies that the banking system will be subjected to further outflow of funds.

Although the central bank has been referring to the existing cash crunch as a temporary phenomenon, traders say that the market has been starved of cash for more than two months now.

Recap: The yield on the benchmark 10-year bond firmed up to 7.35 per cent on Friday as against Monday's close of 7.28 per cent. Yields looked hard last week in anticipation of the auction. On the back of tight money, the government had lowered the planned borrowing on to Rs 6000 crore from Rs 9,000 crore.

CURRENCY MARKETS
FII inflows to back Re

The rupee looks strong backed by robust inflows from foreign investment into the domestic equity market. The rupee will trade in a band of Rs 44.10 to Rs 44.25 per dollar.

"Inflows will continue its current trend till the announcement of the budget," said a treasury dealer.

The RBI's intervention, however, is likely to curb any sharp gains by the rupee, say dealers. Although the rupee is overvalued by 10 per cent at current levels, it is the cash squeeze in the domestic banking system, which has prompted the RBI to step into the forex market, said another dealer.

Typically government-owned banks buy dollars on behalf of the central bank in the forex market. They were last week mopping up most of the dollar supplies from foreign funds and exporters, said a trader at a foreign bank.

"The central bank does not appear very keen that the rupee breaches the 44.20 mark," he said.

Recap: The rupee rose on Friday to 44.19 compared with Monday's close of 44.24 backed by the yen's surge against the dollar and rising FII inflows into the domestic equity market. RBI, however, muted the currency's gain through its surrogate intervention in the forex market.

Steady FII inflows have been a key determinant in the rupee's gain vis-a-vis the greenback. As per the latest data, FII investments in 2006 totalled $1.2 billion.