Liquidity will curb any major downside

Outlook: Money markets

The money market will continue to witness a liquidity overhang this week.

The surfeit of cash will also be the factor propping up sentiment. But the liquidity-driven rally is likely to be countered by expectations of a rise in inflation.

The inflation rate for the week ended April 10 stood unchanged at 4.40 per cent even as prices of wheat, rice, vegetables and several edible oils fell.

The banking system is flush with cash as the expected surge in credit offtake has not taken place and there is no Reserve Bank of India intervention through open market operations.

Outflows this week are likely to be limited to the 91-day and 364 -day treasury bill auctions for a total Rs 4,000 crore and the re-issue of the 6.18 per cent 2005 paper worth Rs 5,000 crore on April 27.

The government may cancel the auction slated for May and this may add to the funds mountain.

That liquidity in the banking system is abundant can be gauged by the fact that a surplus of around Rs 96,085 crore is parked at the repo window. Inflows will be of Rs 1,093.40 crore this week through redemption of treasury bills, gilts and coupon payments.

Meanwhile, repo subscriptions continues to flood the market. When the seven-day repo auction was launched, the RBI used to receive subscriptions of around Rs 7,000 to Rs 8,000 crore.

However, the amount now has increased to Rs 20,000-27,000 crore.

Treasury bill cut-offs seen low

There are four treasury bill auctions this week "" two 91-day papers aggregating Rs 2,000 crore and a 364-day paper aggregating Rs 2,000 crore. Both are scheduled to be held on April 28.

Going by the cut-off rates set last week, dealers expect the RBI to keep the yield almost unchanged at 4.38 per cent on the 91-day issue. The cut-off yield on the 364-day bill is expected to be around 4.45-4.47 per cent.

Last week, the RBI has set a cut-off yield of 4.38 per cent on the 91-day bill and at 4.47 per cent for the 364 day bill.

Good trading was witnessed in treasury bills on account of higher returns and zero price risk.

Financial institutions and mutual funds were active participants in the market. With the fall in the primary supply of commercial papers (CPs) and certificates of deposits (CDs), players are investing heavily in treasury bills. According to participants, there is still plenty of appetite for such paper.

Meanwhile the supply of treasury bills is good thanks to the market stabilisation scheme. With the outlook on long-term interest rates blurred for some time, players preferred to trade in treasury bills last week.

Call rates to continue sub-repo run

The inter-bank call money rates are expected to rule easy at sub repo levels as there is not much demand for liquidity. There was no major outflow last week either.

With the seven-day repo in place players are more inclined to lend in the call money market and stay liquid.

Intra-day call rates are likely to hover in the 3.00 to 4.50 per cent range. Last week stray deals were stuck at 3.00 per cent. Mutual funds continue to be major lenders in the market.