Net outflows unlikely to impact liquidity

OUTLOOK: Money markets

Liquidity will remain abundant this week but it will be the second lot of exit poll numbers, to be announced on May 5, that will be crucial to sentiment.

Inflation, on the other hand, continued flat at 4.4 per cent, which spurred some late buying last week.

The exit poll results of last week were a big dampener "" it affected foreign exchange inflows which have been till now the main trigger for liquidity.

Market analysts said with rates in the United States on the ascend, inflows could taper in the medium term and their impact on liquidity will reduce too.

Meantime, surplus funds in the money market, estimated at Rs 70,000-75,000 crore are locked in seven-day repos. The money will return to the banking system in tranches on maturity.

Outflows this week will be around Rs 11,000 crore including Rs 2,000 crore towards treasury bills and Rs 9,000 crore towards government security auctions. But inflows would be far less at around Rs 5,891 crore. But this is unlikely to have an effect on liquidity, according to analysts.

Call money hovers in easy lane

Call rates are expected to rule lower as there is not much demand for funds, primarily because there were no major outflows in the past few weeks.

Following the advent of the seven-day repo, market participants are preferring to lend in the call market to keep themselves liquid.

However, intra-day volatility is on the cards on political uncertainty and gilts players and primary dealers running to cover their positions.

Along with call, participants are also preferring to remain invested in the collateralised lending and borrowing instruments of Clearing Corporation of India.

As long as the repo window of the Reserve Bank of India continues to see a flood of subscriptions, there is only one way the call money rates could go.

Just after the launch of seven-day repos, subscription used to be around Rs 7,000-8,000 crore. However, the amount has now increased to an average of Rs 15,000-20,000 crore.

This is because after seven repo auctions were conducted, outflows at each auction from the eighth was countered by inflows from the maturity of an earlier issue. Liquidity, therefore, is not affected by the measure.

Treasury cut-offs seen market-related

There are two auctions of 91-day treasury bills slated for this week. While one bill will be floated for Rs 500 crore under the regular government borrowing programme, another, for Rs 1,500 crore, will be issued under the market stabilisation scheme.

Both auctions are scheduled for May 5. Market participants are of the view that the cut-off rates on these papers will be in line with the market rates and expectations.

Dealers expect this week's rates to be low considering that the cut-off rates last week were pegged higher at 4.40 per cent.

Dealers attribute this to the fact that there is too much paper supply in the short term.

Meanwhile, last week once again saw activity from all segments of the market, especially foreign institutional investors.

The activity in treasury bills has picked up due to arbitrage thrown up if one converts dollars into rupees "" even with a forward cover "" and then invests the money in treasury bills.