Liquidity may be tauter due to outflows

OUTLOOK: Money markets

Inflation has come down to 7.80 per cent, but oil prices above $49 per barrel remains a big negative for the market.

On the other hand, bullish outlook on the rupee is likely to attract good portfolio inflows. This, in turn, will be one of the major reasons for liquidity rising in the coming months.

There are two immediate triggers for the market: One, if economic data from the United States show positive trends, it would make the dollar bullish.

And secondly, if the government announces its borrowing programme as scheduled for this week, the sentiment might turn bearish.

On the liquidity front, the increase in cash reserve ratio by 50 basis points will suck out about Rs 8,000-9,000 crore from the banking system.

But the funds situation seems to be improving with gradually increasing inflows from portfolio investors and direct investments.

Dealers said in the medium term, if credit offtake picks up well, there will be greater competition for funds.

Bankers said with there being so much uncertainty on the inflation, oil prices and interest rate fronts, players are expecting a mellowing down of the yield on government securities as excess liquidity chases sovereign paper.

Meanwhile, there will be an inflow of around Rs 2,092 crore this week towards coupon redemption and maturity of government papers.

Outflows will hover around Rs 8,000 crore. This will include Rs 2,000 crore towards auction of treasury bills and the market stabilisation scheme, while the rest will be auction of dated securities towards the public borrowing programme.

Call money forecast in 4.20/30% range

Call money rates are expected to remain soft in the 4.20/30 per cent range as advance tax payments will be making their way back into the banking system.

Overall liquidity in the system stands at Rs 15,000-Rs 16,000 crore currently.

This week might see some stiffness in call rates because of the Rs 8,000 crore outflow. Last week, the rates were higher at 4.75-5 per cent due to banks coughing up higher cash reserve ratio maintenance and due to outflows and advance taxes.

Banks that were not trading and instead sitting on excess liquidity "" earned by liquidating gilts "" have started aggressively trading after they have been permitted to transfer SLR securities to the held-to-maturity category.

This would lead to additional funds pressure owing to mismatches in the liquidity positions.

Market-related t-bill yields seen

There is one set of auction of treasury bills proposed to be held this week. There will be 91-day treasury bills auction "" Rs 500 crore towards the government borrowing programme and Rs 1,500 crore towards the market stabilisation scheme.

Yields are expected to be market-related this week. Last week, the 91-day was auctioned at a cut-off yield of 5.04 per cent and the 364-day paper was auctioned at 5.34 per cent.