Liquidity strain may continue

Gilt auction and forex inflows globally hold the key

Yield on the ten-year benchmark paper is expected to rule in the 7.85-7.90 per cent range

The spot rupee is likely to rule in a wider range of 44.15-44.35 against the dollar

Liquidity
No major outflows

Liquidity in the market will continue to remain under strain. While there are no fixed inflows slated for this week except for the coupon redemptions and the maturity of government securities, the market feels corporate inflows may accrue.

Even as the auction is slated for this week, outflows will happen only next week. This week, therefore, may not see major outflows.

As the rupee has been appreciating, most corporate houses may be seen realising their foreign exchange proceeds "� in the form of ADRs, GDRs and external commercial borrowings.

Although the liquidity level may not change much this week, the tightness will continue to play in the minds of market players. Therefore, any trigger "� in the form of the cut-off yield announced in the auction of dated securities or treasury bills or views on the monetary and credit policy "� may impact the situation.

Since a new fortnight will start this week, banks may be seen scurrying to set aside funds for the reserves requirement. On the other hand, there is still sometime before we see fresh government expenditures "� at least till new Budget proposals are rolled out.

With the dollar gaining this week, the spot rupee may depreciate. And if this happens, exporters may rush to realise their dollar receivables. This, in turn, will augment the liquidity situation as banks will be dollar-surplus, which can be converted in rupees.

Call rate
Forex inflows by mid-week likely

The interbank call money rate will continue to hover in the 8-8.50 per cent band. The market is expecting no fresh inflows or outflows from the system this week.

However, foreign exchange inflows in the form of portfolio investment and corporate proceeds of GDRs/ADRs and external commercial borrowings may figure during the middle of the week, said dealers. Intervention by the RBI continues to remain a source of liquidity. The RBI has been infusing liquidity into the market through purchase of government securities, which is otherwise referred to as repo.

Repo is the liquidity adjustment facility under which banks take cash by pledging government securities. In the foreign exchange market, the central bank will continue infusing liquidity into the market by buying dollars.

Treasury bills
Yields may rise

The RBI will float 91-day and 182"�day t-bills for auction in the market to raise a total of Rs 3,500 crore. Even as the tight liquidity situation has moderated over the last week, the market is cautious. The secondary market trading has also been quite lacklustre. Therefore, t-bill yields might figure on the higher side .

The players are of the view that once the policy review is over, there might be fresh interest in the trading of the treasury bills. Foreign bankers may be seen as major traders in t-bills, as the foreign institutional investors (FIIs) are likely to start their allocation into the Indian markets, both equity and debt.

The Securities and Exchange Board of India last week enhanced the existing limit available for the FIIs to invest in government securities and treasury bills from $2 billion to $2.6 billion.

Recap: At the auction held last week, yield on the 91-day t-bill continued to remain at 7.14 per cent while the 364 day t-bill witnessed the cut-off yield being raised from 7.18 per cent to 7.27 per cent.

Government securities
Bearishness to prevail

The government securities market is likely to remain bearish. Even as the market was expecting the RBI to cancel the scheduled auction, the government announced the sale of 7.94 per cent 2021 on January 25 for a notified amount of Rs 5,000 crore.

Since the liquidity is tight and banks are yet to receive any firm clues from the RBI on its view of the liquidity, auction outflows will mar the sentiment.

Secondly, the market is awaiting eagerly for the RBI to unveil its fourth quarter monetary policy analysis. They are of the view that with inflation inching above 6 per cent, the RBI may opt for hiking the reverse repo rate to further rein credit and money supply.

The ordinance brought by the government removing the floor for the banks to maintain the statutory liquidity requirement (SLR) has already affected the market. With the credit policy round the corner, the market feels that the RBI may provide some direction regarding the roadmap for tinkering with the SLR requirement.

Inflation continues to be a concern but players are divided on the view that this might trigger a rate hike. This is because, the spurt has been mainly on account of supply side constraints.

Globally, the dollar has been gaining and so is the yield on the US treasury bonds. This could have affected the market sentiment but not this time. Players maintained that the domestic factors this week outweigh issues overseas factors.

In this backdrop, the yield on the ten-year paper is expected to open in the range of 7.85-7.90 per cent.

Recap: Last week, the trading in the government securities remained highly rangebound and lacklustre, apprehending the announcement of the scheduled auction. Deals were mostly restricted to the benchmark securities in the medium- and the long-term paper.

Corporate bonds
Firms, banks to wait

Most of the corporates and banks will wait for cues from the fourth quarter monetary policy review. Till then they would wait so as to get a clear signal on interest rates. Liquidity is another concern which is currently pushing up the rates.

The credit policy statements may throw up some light in that direction as well, primarily the views of RBI, said a dealer. Some of the banks which may still tap the market for raising tier-II and upper tier"�II funds are Bank of India and Syndicate Bank, but their plans are yet to be finalised, the dealer said.

The secondary market will continue to witness need-based buying from insurance companies and provident funds. Trading interest will remain lacklustre since the government securities market, which serves as the benchmark for the corporate bonds, is likely to remain bearish.

In the medium term, however, the corporate debt market may witness demand from the public and private sector companies for raising funds. This is because rising forward premiums has made the cost of swapping foreign funds with Indian rupee expensive which incidentally was the advantage for borrowing overseas funds.

Recap: The corporate debt market continues to remain illiquid. The spread between the triple-A paper and underlying government securities for 10-year maturity, however, hovered in the 100-120 basis points range during the week because of the rising gilt yields. However, provident funds continued to invest in bond papers floated by banks and oil companies.

Rupee
Upward bias seen

The spot rupee is likely to appreciate given the spurt in foreign exchange inflows. Even if the week is short, most of the corporates are bringing back the funds raised overseas in the form of American or global depository receipts or external commercial borrowings.

In view of the appreciation of the spot rupee, most of the exporters will be also seen realising their proceeds for fear of depreciation in the value of the spot rupee conversion.

Foreign exchange inflows through portfolio investments may also push the spot rupee towards appreciation.

However the rupee may face pressure for depreciation from oil companies, which were seen heavily buying dollars last week for making import payments. Analysts expect that with month-end approaching, the buying spree will continue.

Globally, the Michigan consumer confidence index has figured way above the expectation. The sentiment has surged from 91.7 in December 2005 to 98. The dollar during the weekend approached a four-year high against the yen and gained most against the euro. This might also affect the rupee-dollar movement.

The rupee premiums to be paid on forward dollars will continue to rule higher. Besides the fact that the cost of rupees has gone up following the tightness in the liquidity, there are other factors at play.

Most of the market players expect the RBI to raise the reverse repo rate in order to signal higher interest rate . Since this perception will be built into the cost of the rupees, the premiums will firm up higher, feel the players.

The cost of rupee funds affect premiums since booking forward dollars require banks to pay premium in the form of rupee which has become expensive following tightness in the liquidity.

In this backdrop, the spot rupee is expected to rule in a wide range of 44.15-44.35 against the dollar.

Recap: Even as the dollar appreciated against major currencies globally, the spot rupee appreciated following foreign exchange inflows. The inflows primarily were sourced from corporate proceeds of GDRs, ADRs and external commercial borrowings.

However, liquidity concerns played an active role in the forwards market. The annualised premiums on forward dollars continued to remain high, both on account of high cost of rupees and demand from oil companies.