Range-bound mart supported by good liquidity ahead

OUTLOOK/MONEY MARKETS

Liquidity continues to be more than adequate in the system with no major credit offtake in the banking industry or any government auction in the immediate future.

The daily average inflows into the repo market amounted to Rs 27,605 crore last week, higher than the preceding week's average figure of Rs 26,506 crore.

The market, as reported last week, was bullish largely on the back of the feel good factor "" rising liquidity as foreign exchange reserves cross the $100 billion mark and further expectation of Rs 8,000 crore coming into the system from interest on special deposit scheme (SDS).

This fuelled an upward surge in government security prices, a trend which is expected to continue this week. With prices on long-term paper having risen by over Rs 4 in the last fortnight, some consolidation is expected this week.

Activity has been seen in the price of government paper in the maturity segment 2017-2023.

Banks are seen to be taking positions in long-term paper in the hope of offloading the same to provident funds (PFs), which are expected to be paid interest on their holding of SDS paper. PFs are known to invest long in order to match their long-term liabilities.

At the same time, the consolidation expected this week will help banks book treasury profits for the third quarter ending. Sustainability at these yields is not possible as the yield curve is seen to be flattening, and credit offtake is expected to take place a month down the road.

At the same time, considering it is an election year, the government might decide against paying out the interest on the SDS. This would help PFs, which otherwise would find it difficult to meet the assured nine per cent return since reinvesting the interest would fetch at most six per cent return.

Additional liquidity to keep call rates at sub-repo levels
Overnight call money rates will continue to rule below repo levels of 4.5 per cent as there is no additional demand for funds, except to meet statutory requirements.

Despite non-bank participants like mutual funds henceforth not be able to lend more than 60 per cent of their average daily lending in the call market, this will have no bearing on call rates on account of the liquidity excess in the system.

Much of overnight borrowing is taking place at about four per cent, and call rates continue to be artificially pegged at repo levels.

Net inflows to be higher at Rs 2,684 cr
Net inflows will rise sharply to Rs 2,683.99 crore as gross inflows amount to Rs 3,183.99 crore. The only outflow in the coming week is the Rs 500-crore auction of 91-day treasury bill on Wednesday.

Funds have been flowing into the market on the back of rising weekly forex reserves, as well as interest coupon payments on central and state-level government borrowings.

Appetite for treasury bills to surge, yields to soften further

Appetite for treasury bills will continue to increase especially now that non-bank participants' limits in call lending have been further reduced to 60 per cent against 75 per cent earlier.

Yields on bills have been inching down slowly partly on the back of some market participants not inclined to invest for the long term.

Demand for short-term paper is bringing down the yields, especially since supply of treasury bills is limited.

The Reserve Bank of India (RBI) raised the cut-off price at its last weekly auction of 364-day treasury bills to Rs 95.87 from Rs 95.84, thereby resulting in the yield falling to 4.3198 per cent from 4.3525 per cent. Yield on 91-day treasury bill has already fallen to less than 4.2 per cent.