Liquidity to remain abundant

OUTLOOK/ MONEY MARKETS

Liquidity will remain abundant this week, but there is an element of doubt creeping into the participants' minds.

The refrain on the street is that the common minimum programme, which was expected to trigger some positive trends, turned out to be quite the opposite.

The equity market crashed by more than 200 points and was followed by a fall in bonds and the rupee.

Inflation at 4.67 per cent added to the bearishness. There is little room for it to go down further what with oil and commodity prices on the rise.

Participants said forex inflows might taper with foreign institutional investors (FIIs) preferring to sit on the fence till some clarity on the new government's position emerges from the Union Budget.

Under the circumstances, liquidity could come under pressure in the medium term. It is comfortable at present and remains the only force pushing the yields down.

Partha Mukherjee, head of treasury at UTI Bank, said the markets will remain volatile at least till the Budget.

Amit Bansal, head of treasury at Barclays, presages a weak bond mart. "The spot rupee will hover in the range of 45.30-50 and will recover as soon as apprehensions in the equity market ease and unloading by foreign institutional investors stops. And oil prices at $35-36 per barrel will add to the positive sentiment," he said.

Outflows will be to the tune of Rs 12,000 crore this week including Rs 2,000 crore towards treasury bills under the government's borrowing programme and market stabilisation scheme.

Lower call rates on the cards

Surplus liquidity, which currently stands at Rs 70,000 crore approximately, is locked in the seven-day repo of the Reserve Bank of India.

While the money will return to the banking system in tranches as and when the repos mature, lack of substantial outflows will lend comfort as far as liquidity is concerned.

Call rates are expected to rule lower as there is not much demand for liquidity, primarily because there were no major outflows in the past couple of weeks. With the interest rate scenario uncertain, volatility in the rates is unlikely.

Last week, interbank call money rates shot up to 6.5 per cent as bankers miscalculated assets and liabilities and parked excess funds in repos.

On the other hand, outflows were slated towards state government loans. Banks also needed to buy dollars for month-end oil payments.

Market-related cutoffs seen in T-bills

There are two auctions of the treasury bills slated this week and both are 91-day issues. While one will be auctioned under the market stabilisation scheme for Rs 1,500 crore, the other, for Rs 500 crore, will be a part of government borrowings.

Participants are of the view that the cut-off rates on these papers will be in line with the market rates and expectations.

In fact, going by cut-off rates early last week, dealers expect this week's rates too to be around the current levels.

With outlook on the short-term interest rate bullish, trading interest in the treasury bills is likely to be brisk.

"At times of uncertainty, these instruments help in making quick profits without overloading the portfolio with high coupon long-term bonds," said a dealer.