Rising inflation a key concern

OUTLOOK/ MONEY MARKETS

For now, liquidity in the money market seems to be at a comfortable level, going by the repo subscription numbers. But, given the rising domestic headline inflation rate and the looming possibility of an increase in global interest rates, there will be some strain on the abundance of funds, especially foreign inflows.

Market players have started casting their doubts on foreign fund flows. They are of the view that if the no firm policy signals emerge from the Centre, foreign investors might take a relook at their investment plans for India.

Further, with the signs of rising interest rates globally, especially in the US, the case for foreign fund outflows is quite justified. Although the US Federal Reserve's funds rate is at its 40-year low, bond yields there have started looking up for quite some time back.

On the domestic front, inflation is posing a problem. Last week, the inflation rate stood higher at 5.02 per cent compared with 4.67 per cent the previous week. This has affirmed the market fears that rising inflation rates will spur the case for higher interest rates sooner or later.

Therefore, liquidity even if abundant currently, has ceased to be a trigger for the bond market for a possible rally in prices.

Dealers said there is no near-term problem for liquidity. This, they added, was due to the absence of major outflows from the banking system, apart from the treasury-bill auctions under the government's borrowing programme and market stabilisation scheme this week.

The auctions will amount to an outflow of Rs 4,000 crore. Also, there will be inflows to the tune of Rs 1,592 crore from coupon redemptions and gilt maturities.

Call money rates likely to stay low

Call money rates are expected to rule lower this week as there is enough supply of and tepid demand for funds.

About Rs 60,000-65,000 crore is currently locked with the Reserve Bank of India (RBI) as outstandings under the seven-day repos. While this amount will come back into the banking system in tranches, as and when the seven-day repos mature, lack of any outflows from the system will ensure abundant liquidity in the call money market.

Moreover, due to absence of major outflows during the preceding weeks, there seems to be not much demand.Last week, call money rates touched a high of 6.5 per cent due to intraday liquidity mismatches.

Dealers said that was due to misjudgement of banks in their liquidity management (for putting money under repos and keeping aside funds to meet the auction outgo of around Rs 10,000 crore).

T-bills trading will be brisk

There are four auctions of treasury bills slated this week. There will be two 91-day t-bill issues and two 364-day t-bill ones.

One set of a 91-day t-bill issue and 364 day t-bill issue will be auctioned for Rs 500 crore and Rs 1,000 crore receptively as part of the government's borrowing programme. Another set will be auctioned for a total of Rs 2,500 crore under the market stabilisation scheme.

Market players are of the view that the cut-off interest rates on these bills will meet the markets' hopes. Going by the last week's cut-off rates, dealers expect this week's rates to be around the current market rates.

With the outlook on short-term interest rates being bullish, trading interest in the t-bill market is likely to be brisk.

According to a dealer, "At times of uncertainty, these instruments help in making quick profits without overloading the portfolio with high-coupon, long-term bonds."