Surplus liquidity to continue

OUTLOOK/ Money markets

Liquidity continues to be in surplus and market players such as banks and primary dealers are just sitting on it. Credit offtake is yet to pick up pace and investment in treasury instruments are proving to be risky with rising interest rates.

Ways and means advances continue to add up to the liquidity. The government week after week has been drawing ways and means advances for its expenditure. For the week ended July 16, the WMA drawals were at Rs 1,319 crore against Rs 3,629 crore for July 9.

The inflation rate has been going up since the last four consecutive weeks. Inflation for the week ended July 9 hovered at 6.52 per cent up.

According to bond dealers, rising inflation is likely to impact the overall interest rate, which is poised to go up at this point as indicated by given economic parameters.

While there will be an inflow of Rs 2183.31 crore, outflows will be around Rs 10,600 crore. Treasury bill auction will suck out Rs 2,000 crore, while another Rs 8,600 crore will be absorbed from the system through the on-tap sale of state development loans 2013.

Moreover, there have been outflows from the system to invest in non-deliverable forward markets overseas markets owing to the yield differential. However, these outflows are temporary.

Overnights likely to be calm

Banks, mutual funds and primary dealers are sitting on cash as they fear investing it in government securities given the rising yields. Thus, any investment in gilts would lead to booking of losses in their portfolio.

Therefore, call rates will remain comfortable as there are not many avenues to park funds. Call rates are expected to remain comfortable in the range of 4.25-30 per cent.

In the medium term, demand for credit is likely to go up sharply with current impetus on rural credit, which also could put come pressure on call rates and on overall liquidity . Last week, the repo subscriptions was in the range of Rs 5,000-15000 crore.

Gilts may see fresh buying

Government securities are likely to see some buying from banks and insurers as prices are too lucrative. However, the fear of booking losses in the books might lead to some restrain on the part of dealers. Last week, the gilts market cheered the government's decision to waive the turnover tax on the debt market.

However, the breather did not mean much as the inflation rate, which was announced on Friday, touched 6.52 per cent. Yields across maturities turned negative ranging from treasury bills to the 24-year paper.

Market feels that the 10-year benchmark is likely to remain stuck to 5.86-96 per cent even though it had reached almost 6 per cent last week and closed in the range of 5.95/97 per cent. If there is good buying, then yields might soften, said dealers.

However, dealers are of the view that with global interest rates on a high and the US Federal Reserve expected to revise base rates upwards by another 25 basis point, interest rates on bonds are expected to go up further.