Staring at a problem of plenty

OUTLOOK/MONEY MARKETS

Liquidity is set to pour in from all sides this week. While trade and foreign institutional investor inflows will continue, money locked in with the Reserve Bank of India (RBI) too will come back into the banking system.

While Rs 7,000 crore is locked in the 14-day repo, around Rs 7,200 crore is with the RBI as inflows from 7-day repos conducted for three days.

The system is witnessing daily average repo subscriptions of Rs 40,000- Rs 45,000 crore.

Meantime, the management of excess liquidity is posing challenges in the wake of the introduction of the market stabilisation bonds and the seven-day repo.

Inflation last week was a matter of cheer as the year-end figure at 4.3 per cent was within the projected range. However, some dealers said that the provisional figure might change after the impact of oil prices hike is incorporated in the final figures to be released later.

This week, there is an inflow of Rs 2,530.63 crore to the system as against outflows of Rs 500 crore towards routine treasury bill auction and Rs 1,500 crore towards the market stabilisation scheme. Moreover, Rs 14,000 crore will be flowing back into the system through repo inflows.

Call seen easy

Interbank call money rates are expected to continue to rule soft as there is a cash overhang in the system "" forex inflows are expected to pick up following the proceeds of external commercial borrowings coming in and there seems to be no stopping foreign institutional investor inflows.

Liquidity is also increasing because of the Mint Road's attempts to sterlise forex inflows by inducing rupees.

And there are not enough avenues for parking the excess liquidity either.

This is because the one-day repo window has been replaced by the seven-day repo and locking in money for seven days at one go is difficult for participants.

As a result, call rates have emerged as a favourite stop for banks to park funds.

However, they feel that rush to park in the call mart will end once the standing deposit facility comes up. This will require an amendment to the RBI Act.

Treasury bills

There are two treasury bill auctions slated for this week, both of 91-day issues.

While one set of bills will be auctioned for Rs 500 crore as part of normal borrowing, the other will be of Rs 1,500 crore towards treasury bills under the market stabilisation scheme.

The cut-off rates are expected to be extremely competitive going by the market yield on the bills.

Last week, the interest rates have gone up by 12 basis points indicating a firming up of yields in the short end of the curve.

This has also spurred concern over the realignment of the yield curve even in the long term.

Treasury bills have for quite some time emerged as one of the attractive options from the arbitrage point of view with one-year forward premiums on the dollar ruling below one per cent.

Last week brisk trades were executed in treasury bills as dealers feel the yield will be pulled down in the coming weeks.

This is because in there will be an oversupply of short-term papers in the market as seen from the auction calendar announced by the RBI the week before last.