Liquidity seen at comfortable levels

OUTLOOK/ MONEY MARKETS

The banking system continues to be awash in cash, a testimony to which is the Rs 60,000 crore of repo subscriptions with the Reserve Bank of India (RBI).

The daily average repo bid size, however, came down to Rs 6,000-7,000 crore last week from Rs 13,000-15,000 crore in the week before.

This does not necessarily mean fund levels within the banking system is coming down, but the impact of foreign exchange inflows on liquidity has certainly reduced.

This week, there will be an inflow of Rs 898 crore and an outflow of Rs 9,000 crore from the banking system.

Meantime, the government continues to dip into the ways & means advances (WMA) facility for its fund needs. During the week ended July 23, WMA drawals stood at Rs 1,616 crore, compared with Rs 1,319 crore in the week ended July 16.

The headline inflation rate, which has been soaring for the past many weeks, stabilised at 6.52 per cent for the week ended July 16.

Meantime, the last week's higher-than-expected US consumer confidence data have pushed the case for another 25 basis point hike in the Fed Funds rate in August.

Overnight rates to stay in the 4.25-4.30% band

Banks, mutual funds and primary dealers are chary of investing in government securities with yields on the ascend, and are preferring to sit on their cash pile.

Therefore, the overnight rates are expected to remain comfortable in the 4.25-4.30 per cent range "" where they have been for the past few weeks "" this week too.

In the medium term, however, the demand for credit is likely to go up sharply, with the current RBI thrust on rural credit. This may put some upward pressure on the call rates and overall liquidity in the banking system.

Two sets of T-bill auctions lined up

There are two sets of treasury bill auctions this week. One will be of 91-day bills, to be auctioned for a notional amount of Rs 2,000 crore: Rs 500 crore towards the regular government borrowings programme and Rs 1,500 crore part of the market stabilisation scheme (MSS).

There will also be a 364-day treasury bill for a notional amount of Rs 2,000 crore: Rs 1,000 crore towards the government borrowings programme and Rs 1,000 crore part of the MSS. Market participants are of the view that the cut-off rates on these paper will be in line with the market's expectations.

The uncertain outlook over the interest rate scenario has made treasury bills as the most favoured instruments in a money market player's portfolio, as they keep the duration less, and thus slackening the impact of interest rate volatility on a portfolio.

Dollar demand from foreign banks to rise

The rupee is expected to hover between 46.30 and 46.80 against the dollar this week. Over the past few weeks, the currency has been depreciating due to huge demand for dollars from foreign banks.

Dealers are of the view that the rising arbitrage opportunities between the conventional forex market and the non-deliverable forwards market is driving up the demand from the foreign banks, which are buying dollars on behalf of their corporate clients most of whom have huge exposures in the southeast Asian markets.

Meanwhile, premiums on forward dollar are expected to rise as exporters, who have earlier booked their receivables, are cancelling and rebooking on hopes of getting higher premiums.

Thinning foreign exchange inflows are putting a pressure on the rupee.

With every incremental rise in the rupee, importers are getting panicky and are running for cover.

This is also contributing to higher premiums on forward dollars.