Repo deals look attractive

OUTLOOK/MONEY MARKETS

The liquidity situation seems to be no more the crucial factor for the movement in the bond market.

Despite liquidity being abundant, the markets last week rallied as players built up positions expecting a fall in inflation to hover around 5.60-65 per cent.

While the repo has come as a handy instrument for the RBI for market management, subscriptions seem to be signalling an abundance of liquidity in the system.

According to market dealers, with no buying demand coming in the market, the repo seems to be most attractive for parking funds.

In fact, banks are engaged in repo deals among themselves and other non-banking players with overnight repo rates in the 3.60-3.80 per cent range as against 4.5 per cent at RBI repos.

While there is inflows of Rs 1,087.53 crore into the system, outflows stood at Rs 5,700 crore including Rs 1,500 crore towards treasury bill auctions and the Rs 4,200 crore state loan auction.

Even if outflows exceed inflows, the abundance in liquidity will check any pressure on the system.

During the year, the liquidity is likely to be under pressure in the medium-term, as foreign exchange inflows tend to get less concentrated in India as rates have firmed up elsewhere also.

Moreover, with good economic data, the growth is expected to be high and this will get reflected in high credit growth.

Soft bias in call may continue

Interbank call rates are expected to continue soft as there is a liquidity overhang in the system with forex inflows expected to pick up following the foreign exchange norms reforms.

While the liquidity situation is getting added for sterlising forex inflows by inducing the rupees, besides repos, there are not enough securities with the RBI to absorb the liquidity.

After almost a month, there will be a state loan auction of Rs 4,200 crore followed by the government auction next week.

Last week, the RBI and the government both relaxed currency account transactions paving the way for forex expenditure for resident Indians.

With international rates firming up, if capital flight occurs, then the liquidity situation might face some strain in the medium-term.

Structurally, call rates are ceasing to be the only tool for managing day-to-day liquidity in the system. As the entire market is looking forward to the repo auctions, call rates are expected to rule a bit firm next week, towards the end for reserve requirement for reporting Friday.

91-day t-bill may don low cut-off rate

There are two treasury bill auctions slated for this week "" Rs 500 crore towards the 91-day t-bill and Rs 1,000 crore for the 364-day t-bill. The cut-off rates are expected to be competitive going by the current market yield of t-bills.

Last week, t-bill interest rates have come down marginally. Going by the current rates, the RBI is likely to announce a lower cut-off rate for the 91-day t-bill.

It is observed that short-term yields as indicated by t-bill rates have slipped below the repo rate of 4.5 per cent.

However, with the 91-day t- bill at 4.32 per cent, lack of interest rate outlook is leading market players to invest in treasury bills for interest rate differentials.

In fact, t-bills for quite some time have emerged as one of the attractive options from the arbitrage point of view with forward premiums ruling below one per cent for one year.

Dealers seem to be enthusiastic of treasury bills as they feel there is still large scope for a fall in interest rates in the short end at a time when the scope for a further slip in long-term yields look capped.

Also, there seems to be less incentives for players to buy gilts and build positions in the long-term.