Rising WMA drawals to prop up liquidity

OUTLOOK/ Money markets

Liquidity has again taken the spotlight as a trigger in the government securities market. This time it is not due to foreign exchange inflows, but due to the government's withdrawals of ways-and-means advances (WMA).

For the week ended July 10, the WMA withdrawals were at Rs 6,035 crore, compared with Rs 3,222 crore in the previous week.

The government's WMA drawals and the rising demand for credit are likely to put an upward pressure on the headline inflation rate, which was at 6.09 per cent for the week ended June 26, and, ergo, on government security yields. So, domestically too, interest rates are poised for a skyward run.

The outstanding liquidity in the banking system, as seen from the seven-day repo outstandings with the Reserve Bank of India (RBI), has gone up from Rs 50,000 crore to around Rs 65,000 crore last week.

On the front of foreign exchange inflows, the Budget has clearly signaled an investor-friendly climate for foreign institutional investors, and this is likely to boost foreign fund inflows further in this calendar year. India has been the worst performer among the emerging markets so far this year.

... and overnight money rates

Call money rates are expected to remain in the range of 4.25-4.30 per cent on ample liquidity and banks' unwinding of government securities portfolios.

However, the rising WMA withdrawals, apart from the soaring demand for agri-loans, are supposed to increase the demand for the overnight money.

Opacity over transaction tax boosts t-bill trading

Trading in treasury bills has picked up sharply due to lack of clarity over transaction tax on debt securities. Investors are moving into these short-term instruments from the long-term government securities.

This is evident from the sliding turnover in the government securities market. T-bills are mostly traded through the negotiated dealing system (NDS) of the RBI which is out of the purview of stock exchanges.

Since getting quotes on the NDS is difficult, investors are preferring t-bills, for which the market is well aware of the quotes, to other long-term debt securities.

There are two treasury-bill auctions slated for this week. Two of them will be of 91-day bills, to be auctioned for a notional amount of Rs 2,000 crore: Rs 500 crore towards the government borrowing programme, while the rest will form a part of the market stabilisation programme. Players are of the view that the cut-off rates on these papers will be in line with market expectations. Last week, the cut-off yields were below the market expectation.