Liquidity likely to ease; traders differ on rupee

Set to ease

Liquidity will remain comfortable in the market. While the government expenditure continues to remain subdued, foreign exchange inflows will add to liquidity. Following a global market recovery, the Indian equity market is expected to remain strong before further rounds of correction happen, says a banker. This, in turn, will trigger portfolio investment.

Another factor that may continue to be a source of liquidity in the market is moderation in the growth of loans. Dealers say it augurs well for the market, where incidentally investments of banks have grown year on year from 0.8 per cent in 2006 to 19 per cent in 2007.

Call: Comfortable

Inter-bank call rates, the interest rate charged by a bank to another for lending funds, are expected to rule easy, at least till the outflows towards advance taxes happen next week. This will be aided by inflows into the equity market. However, the trend may reverse with a further fallout of the subprime crisis or unwinding of yen carry trade overseas or monetary policy decisions of the central banks in Europe and the United Kingdom slated for September 6.

Treasury bills: Yields likely to rise

The RBI will be auctioning 91-day and 182-day treasury bills for an enhanced amount of Rs 6,000 crore as against the earlier notified amount of Rs 3,500 crore. As a part of the liquidity-tightening measures, the 91-day T-bills will be sold for Rs 500 crore under the government borrowing programme and Rs 3,000 crore under the MSS. Similarly, in the 182-day T-bills, the government will borrow only Rs 500 crore, while Rs 2,000 crore goes towards the MSS.

G-sec: Brisk trade likely

Liquidity will be the primary mover for the market and this is likely to be triggered by foreign exchange inflows. This may result in brisk trading in the government securities market. Trading interest in the market will emerge from banks, which have cornered the gilts portfolio at lower prices. These banks will engage in trade at least before the second quarter ends to avoid a further upward movement of yields. A negative trigger for the market has been the robust growth figure of 9.3 per cent. Banks feel that higher growth is likely to fuel inflation, which, in turn, may lead to monetary-tightening measures by the RBI.

Corporate bonds: Awaiting US Federal Reserve cues

The long-term bond issuers are waiting for cues from the monetary policy meeting of the US Federal Reserve on September 16 and will assess the liquidity situation around September 15 after advance tax payments. Therefore, most of the issuers "" Rural Electrification Corporation, Indian Railway Finance Corporation and Power Finance Corporation "" are likely to wait.

However, the primary market for short-term papers such as certificates of deposit (CDs) and commercial papers will remain abuzz with issues primarily from banks and corporates. Banks are rushing to raise deposits before interest rates harden, says a banker.

Rupee: Differing views

The market reaction is mixed on the movement of the spot rupee. A section of the market is of the view that there has been no fresh fallout of the subprime crisis on the global markets. This is expected to rule out the fears of risk aversion towards emerging markets gradually. Inflows from foreign investors have already started coming into the Indian markets last week, says a dealer. This is expected to continue this week as well, he adds. Forward premia may rise since the rupee liquidity is likely to come under pressure. Most of the banks will set aside liquidity for advance tax payments scheduled next week. Further, importers' covering will put pressure on the pemia for booking forward dollars.