Liquidity on the slide

OUTLOOK/ MONEY MARKETS

The fact that inflation has again gone up to 7.87 per cent and the surge in oil prices to $48 per barrel are the negative triggers for the money markets this week.

The bullish outlook on the rupee is likely to attract good portfolio inflows. This will be one of the major positive triggers for growth in liquidity in the coming months.

Liquidity in the banking system has continued to come down. From a surplus of Rs 25,000 crore, it has slipped to a mere Rs 13,000 crore.

The hiking of the cash reserve ratio by 50 basis points will suck out liquidity to the extent of Rs 8000-9000 crore. This, according to bankers, will not impinge the immediate flow of liquidity but might have an effect on the overall liquidity in the medium term.

In the medium term, the credit pick up will also start competing for the existing liquidity.

Bankers feel that, with so much uncertainty on account of inflation, oil prices and interest rates, the market expects a mellowing down of government security yields only on the back of excess liquidity in the system.

Inflation based on wholesale prices rose marginally to 7.87 percent in the year to September 11 from the previous week's 7.81 per cent.

Before the base effect came into being, the Reserve Bank of India (RBI), through its intervention in the forex market, was not only stemming the liquidity in the system so as not to impact the inflation, but also to curb the forex outflows through oil payments.

Overnight rates expected to remain soft

Call rates are expected to remain soft, in the range of 4.20-30 per cent, this week going by the fact that outflows towards advance tax will be making their way back into the system. However, overall liquidity in the system stands at only Rs 15,000-Rs 16,000 crore.

Last week, call rates remained stiff at 4.75-5 per cent due to the liquidity squeeze towards CRR outflows and advance tax payments. There were outflows to the tune of Rs 13,500 crore as against inflows of Rs 470 crore.

The outflows were around Rs 5000 crore in advance taxes, Rs 4500 towards the tightening of tightening by 25 basis points, and Rs 4000 crore towards the market stabilisation scheme.

However, banks that were not trading and were sitting with the excess liquidity garnered from liquidating their gilt holdings, have now started aggressively trading after they have been permitted to transfer SLR (statutory liquidity ratio) securities to the held to maturity category.

Two sets of T-bill auctions this week

There are two set of auctions of treasury bills lined up for this week. There will be 91-day treasury bill auctions for Rs 500 crore under the government borrowing programme and Rs 1,500 crore under the market stabilisation scheme.

Besides, there will be a set of 364-day T-bill auction for Rs 1,000 crore under the market stabilisation scheme and Rs 1,000 crore for the government borrowing programme.

The yields will be market bid but players feel that though the rates on these papers were market bid, the RBI has the option of rejecting the bids if it were to give a signal that it is not comfortable with the current rates.