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Liquidity cues look optimistic

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BS Reporter Mumbai
Last Updated : Feb 05 2013 | 12:50 AM IST
Likely to remain soft
 
The liquidity position is expected to be relatively soft this week due to the inflows from coupon redemption. However the situation may change if the RBI announces additional securities as a part of the liquidity absorption mechanism under the market stabilisation scheme (MSS).
 
The banks' liquidity requirements towards the cash reserve ratio (CRR) may make a dent on the liquidity.
 
However, the government's expenditure for the new financial year will take care of the additional requirements that banks may have. But there may not be surplus liquidity in the system.
 
The robust foreign exchange inflows which are expected to continue this week may not help the liquidity situation either.
 
This is because the RBI has been refraining from market intervention. The system will see an outflow of Rs 10,000 crore as against an inflow of Rs 7416 crore.
 
Call rate
Likely to be range-bound
 
Call rate is expected to remain in the range of 7-12 per cent, since the liquidity may improve with coupon redemption. It may inch up slightly if the RBI announces tight monetary policy.
 
The market is however in tenterhooks because even if the liquidity position improves, RBI may ensure monetary action to check the impact of money supply on inflation.
 
Treasury bills
RBI to raise Rs 4000 cr
 
The RBI will auction 91 day and 364 day T-bills in the market to raise Rs 4000 crore, as a part of the government borrowing programme and to absorb liquidity for tackling inflation under MSS.
 
The cut-off yield in the T-bills is likely to inch up as the monetary policy may underline hawkish statements, if not effect a hike in the reverse repo rate.
 
There may however be a demand in the secondary market since the T-bills are short-term papers and do not require market valuation.
 
Recap: The call rates shot up to around 17 per cent during the week following tightness in the liquidity. The cut-off yield on the 91 day T-bills therefore figured at 7.47 per cent as against 7.36 per cent the week before.
 
Government securities
Liquidity expected to improve
 
The market is reeling under a bearish outlook. However, the liquidity is expected to improve following coupon redemption and non-announcement of MSS bonds could further trigger the demand.
 
The market is indifferent to an interest rate hike in the monetary policy and is more concerned about the statement following the policy. In any case, the market will witness a demand from the banks to meet the SLR requirements.
 
A rate hike would trigger selling pressure in the market. If the RBI announces a MSS auction, it may hamper the liquidity since there is auction of dated security-8.07 per cent 2017 for Rs 6000 crore and the second tranche of CRR hike comes into effect from this week as well.
 
The yield on the ten-year benchmark yield is likely to rule in the range of 7.90-8.15 per cent, depending on the liquidity conditions.
 
Recap: The market remained rangebound since the liquidity continued to remain tight. The yield on the ten-year paper moved up to 8.11 per cent, but mellowed down to close at a low of 8.06 per cent during the week.
 
Corporate bonds
Clues from monetary policy awaited
 
Most of the issuers of corporate bonds will wait for cues from the ensuing monetary policy to be announced this week. If the RBI does not announce another rate hike, the interest rates for corporate borrowings may moderate since the benchmark rates will come down.
 
The market will witness a demand for capital from banks across the board to meet the additional capital requirements for Basel II. Leading the pack will be State Bank of India and its subsidiaries.
 
Recap: The spread between the 10-year government security and triple A corporate bond of similar maturity ruled at around 150-160 basis points. The secondary market for the bonds remained illiquid, barring the demand from provident funds and insurance companies.
 
Rupee
Likely to appreciate
 
The spot rupee is likely to appreciate further. Corporate capital inflows are the major source of funds into the market.
 
On the other hand, the importer demand is not likely to match up with the supply. The RBI would refrain from intervening in the market to stem the rupee appreciation fearing that the money supply may impact inflation.
 
However the equity market is poised for a correction, according to the market dealers. This would result in a demand for dollars, which might push down the rupee dollar exchange rate.
 
Forward premia will also have an upward bias. The tightness in liquidity is expected to continue.
 
This is because even if liquidity improves, the RBI may mop it up because of the higher inflation figure last week.
 
A fast appreciation of the spot rupee will be an incentive for the importers to book forward dollars. The spot rupee is expected to rule in the range of 41.50-42.10 to a dollar.
 
Recap: The spot rupee continued to appreciate during the week since the RBI refrained from intervention fearing the inflationary impact of the resultant money supply.
 
The spot rupee ended the week at 41.77/78 to a dollar since supply exceeded demand, following heavy corporate inflows. Forward premia continued to rule higher following tight liquidity conditions.

 
 

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First Published: Apr 23 2007 | 12:00 AM IST

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