Liquidity stays high

OUTLOOK: Money markets

Liquidity continues to be surplus in the banking system. A heady rise in the value of one-day repo bids has kept the market awash with funds last week too.

During the week to August 20, 2004, the daily average size of a one-day repo bid stood at Rs 17,000 crore, compared with Rs 2,000 crore in the preceding week ended on August 13. Outstanding liquidity, too, is higher at Rs 34,000 crore.

The government has last week raised the size of the market stabilisation scheme (MSS) to Rs 80,000 crore. This has alarmed the market, which feels that the build-up in the MSS size has supplied the Reserve Bank of India (RBI) an ammunition to suck out extra money sloshing around in the banking system.

Many a banker feels the government security prices are headed for a fall. They point to the still-hovering uncertainties over inflation, crude oil prices and interest rates, all both domestically and globally.

They also feel that open market sales are not a good idea as banks would take a big hit in their treasury profits in the September quarter.

The rise in headline inflation rate reversed last week. Even after incorporating the oil price hikes, the inflation rate stood marginally lower at 7.94 per cent during the week ended August 14, compared with 7.96 per cent in week ended August 7.

Call money rates to stay soft

Call money rates will remain soft in the range of 4.25-4.30 per cent due to the excess liquidity in the market. Banks are sitting with surplus cash that they got by liquidating gilts.

Also, they are not re-entering the government securities market fearing a loss in their portfolios due to rising yields. In the medium term, credit demand is likely to go up sharply with the RBI's current impetus on rural credit, which also could put some upward pressure on the call rates and on the overall liquidity.

Two 91-day t-bill auctions lined up

There are one set of auction of the treasury bills proposed to be held this week. There will be a 91-day treasury bills auction for a notional amount of Rs 2,000 crore: Rs 500 crore part of the government borrowing programme and Rs 1,500 crore towards the MSS.

Last week, the cut-off yield on the 364-day t-bill at 5.4 per cent, well below the yield on the one-year paper of 5 per cent. Moreover, the RBI announced a market yield of 5.53 per cent for the one year government stock "" 6.18 per cent 2005.

Market participants are of the view that though the rates on these papers were market bid, the RBI had the option to reject the bids if it were to give a signal that the current rates are not comfortable.

Uncertain outlook on the interest rate has made treasury bills as one of the most favoured paper for the players so that duration is less and interest rate volatility does not affect the portfolio as well.