Market prefers floating rate bonds

OUTLOOK/ Money markets

Liquidity will remain abundant and this could be a cause for worry this time because there are no major outflows from the banking system excepting a possible state loan for Rs 5,000 crore.

Dealers feel that there are possibilities of reissues coming into the market due to lack of fresh securities with the Reserve Bank of India (RBI).

One of the securities which could be used for either an auction or for an open market operation is the 5.64 per cent 2019 stock, for about Rs 2,000 crore.

And if the Market Stabilisation Bill/bonds do not make way this week, there is a chance that the special deposit schemes could be converted into bonds "" in phases, as and when they come up for payment.There is also a proposal of swapping this payment with high-cost debt of state governments.

As regards the source of liquidity, foreign exchange inflows are expected to be moderately good, but surprisingly, last week did not see a rise in liquidity due to intervention activity of the RBI.

Dealers said that the RBI was not very active in the spot market last week.

According to them, the apex bank's role is limited to rectifying demand and supply mismatches arising in the forex market.The funds position has swelled as most of the players are preferring to remain liquid by selling gilts at a time when yields are on the rise.

And inflation, which figured at a high 6.12 per cent last week, has raised concerns over the interest rate outlook across maturities. This is because real interest rates have turned negative.Dealers expect the inflation rate to subdue this week owing to the greater base effect.

There will an outflow of Rs 1,500 crore on auction of government treasury bills and a possible outflow of Rs 5,000 crore towards government auction and Rs 10,000 crore for state debt swap.However, both these state debt swap programmes and the government auction are yet to be notified.

Till such time, there is only an outflow towards treasury bills. According to dealers, even if the auctions come through, liquidity in the market will be more than enough to take care of the outflows.

On the other hand, inflows work out to around Rs 898 crore on account of coupon payment on gilts, state loans and treasury bills.

Call presaged easy

Call money rates are expected to rule lower as there is not much demand for liquidity, primarily because there were no major outflows from the market in the preceding weeks.

Even if there is an auction in the coming week, it will not affect the net liquidity position in the market.

Comfortable call rates have also been evident from the huge repo subscriptions "" the average daily volume was of Rs 25,000-Rs 32,000 crore while the subscriptions soared to Rs 40,000 crore on Friday.

Dealers said liquidity in the system is continuously rising as many players prefer to remain liquid by selling gilts in an uncertain interest rate scenario.

Cut-offs at treasury bill auctions key

There are two treasury bill auctions - the 91-day issue for Rs 500 crore and the 364-day bill for Rs 1,000 crore, to be held on February 4. Market participants are of the view that the cut-off rates on these papers will be crucial so as to give a clue towards the short-term interest rates.

This is not only because the real interest rates have turned negative but because the cut-off yield announced in the last auction of 91-day treasury bills was higher than the then-ruling rates.

Once again last week saw good activity in treasuries, especially from mutual funds that hold the view that the long-term rates outlook is blurred and that the equity market is headed for a substantial correction.