Liquidity set to surge

OUTLOOK/ Money markets

The headline inflation rate is expected to be moderate this week owing to the decline in crude oil prices globally and the Centre's decision to reduce the price of petrol, while keeping the price of diesel unchanged.

Traders said the inflation rate was expected to dip in the next two weeks due to a favourable base-year effect and petrol price cuts. They expect the inflation rate to dip to 7.10 per cent in this week.

There won't be any outflows this week, while Rs 2,962.43 crore will flow into the banking system through coupon redemptions. Huge foreign exchange inflows are also expected to keep sentiments buoyant. With the festival season ending, cash is expected to flow back into the banking system.

The government's decision to cancel the scheduled borrowing programme between November 16 and November 24 worth Rs 5,000 crore due to a good cash position will ease the market's liquidity conditions further.

Call money rates may decline
The interbank call money rates is expected to decline this week to 5.75 to 6.00 per cent. The softening in the overnight rates will be aided by foreign exchange inflows, cash balances with banks and the cancellation of the scheduled auction worth Rs 5,000 crore. The repo auction will remain an important source of funds for banks.

T-bill auctions under borrowings programme
The RBI has cancelled treasury bill auctions slated for November 24 under the quarterly indicative schedule for market stabilisation scheme (MSS). A Rs 1,500 crore 91-day treasury bill auction and a Rs 1,000 crore 364-day treasury bill auction were scheduled under the MSS.

The central bank will, however, conduct the t-bill auctions as a part of the government borrowing programme. It will auction 91-day t-bills for Rs 500 crore and 364-day t-bill for Rs 1,000 crore this week.The treasury bills market has been witnessing hectic trading of late.

FIIs have been actively investing in t-bills on account of the attractive returns. In the last week foreign funds have invested around Rs 650 crore in these instruments, said market participants.

Bankers said, ever since the Securities and Exchange Board of India, the capital markets watchdog, allowed foreign funds to increase their exposure in the domestic debt to $1.5 billion from $1 billion on November 2, they have been making steady purchases of 91-day and 364-day treasury bills.

Recap: Call money rates ended 5.75/6.00 per cent on Friday last week, compared with 6.00/6.25 on Thursday. The rates hovered around 6.00 per cent, instead of 4.75 percent "" the reverse repo rate "" around which it usually trades when liquidity is ample.