With the payment of the first instalment of advance corporate tax and prospects of a 25-basis-point rise in policy rates, the money and bond market is bracing for pressure on liquidity and rates next week.
Treasury officials said banks have made provisions to manage the corporate tax outflow, estimated at Rs 30,000 crore, so money market rates may not move sharply.
Yet, some uncertainty would weigh on market sentiment as it awaits Reserve Bank of India (RBI) to spell out its stance over inflation in the mid-quarter review on June 16. More so on account of rising food prices and effects on fuel price rise.
On Friday, net liquidity infusions by RBI increased but money market rates were largely stable. According to RBI data, the net bank borrowing at RBI’s liquidity adjustment facility (LAF) window was about Rs 75,960 crore, against net borrowing of Rs 70,425 crore on Thursday.
The overnight call rates moved in a range of 7.25-7.40 per cent on Friday. Liquidity is on the negative side, slightly above RBI’s comfort zone. Yet, rates may not move up significantly next week, said the head of treasury with a large public sector bank.
The debt market has factored in a 25-basis-point rise in repo rate.
The yield on 10-year benchmark government bonds has softened in recent sessions after ruling above 8.40 per cent for a few days. The yield on 10-year paper was 8.23 per cent at the close of trading on Friday.
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Rajesh Verma, head of treasury at Development Credit Bank, said the yield on 10-year paper may move in the range of 8.20-8.35 per cent.
Persistently high inflation, rather than the moderation in growth, will be RBI’s focus.
Leif Lybecker Eskesen, chief economist (India & Asean) at HSBC, said the industrial production reading shows a moderation in growth, not a collapse. Growth will, therefore, remain strong enough to keep inflation pressures simmering and compel RBI to continue tightening.