Sentiment bullish as govt payments to PFs boost liquidity

OUTLOOK/MONEY MARKETS

The market is expected to be bullish this week, driven by the fresh inflow of funds as the centre talks of interest payments to provident funds on special deposit scheme (SDS).

This is expected to add an additional Rs 10,000-12,000 crore to what is already a highly liquid market. This is evident from the fact that last week saw a daily average of Rs 26,506 crore entering the repo market.

This is in keeping with average repo volumes experienced the week before at Rs 26,968 crore. Hence despite tax outflows of about Rs 10,000 crore, liquidity overhang remains constant.

End of last week saw government security prices surge by Rs 1.5-2.0 in papers of longer maturity. This was triggered by a buying spree in the market as provident funds will finally be paid interest on their holding of SDS paper.

Since PFs are known to invest long in order to match their long-term liabilities, activity is expected to continue this week in papers of longer tenure.

Market participants anticipate a 50-60 paise rise in G-sec prices in the maturity segment 2017-2023 papers. Some profit-booking by banks is expected to take place this week as they try to show profits from treasury in the third quarter.

Additional funds to keep call money rates at sub-repo levels

Overnight call money rates will continue to rule below repo levels at about 4.25 per cent levels. Much of overnight borrowing is taking place at about four per cent, and call rates continue to be artificially pegged at repo levels.

The market continues to witness excess liquidity in the system with no major outflow of funds. Further, the tax outflow last week had little impact on the liquidity front.

This also comes partly on account of the RBI's sterlisation process, as foreign exchange reserves crossed $ 98 billion this week.

Net inflows fall to Rs 670.1 crore

Net inflows will fall this week to Rs 670.1 crore even as gross inflows amount to Rs 2,170.1 crore. This comes on the back of auction of 364-day and 91-day treasury bills on Wednesday.

This is despite treasury bills amounting to Rs 1,250 crore being redeemed this week. Interest coupon payments on central and state-level government borrowings have fallen this week.

Next week, the market will see only Rs 41.6 crore inflow into the system. However, with abundant liquidity and no real demand for funds, this will have no bearing.

Treasury bills continue to see good demand

The appetite for treasury bills continues as yields rule well below repo levels. This week's auction of 364-day treasury bills will give an idea on where interest rates are headed, though the central bank continues to remain mum on giving any real direction.

The three-month treasury bill for March have already fallen by five basis points to 4.2 per cent from the earlier 4.25-4.30 levels. The 365-day treasury bill is equally quoting at sub 4.3 per cent levels.

At the same time, with limited trading opportunities and falling yields, these bills are only attracting banks looking for risk mitigation purposes and as a measure to meet their statutory liquidity requirements.