System liquidity may come under pressure

OUTLOOK/ MONEY MARKETS

Market players are not enthused despite the abundant liquidity in the system. Given the political stance of the new government towards foreign investment, the copious forex inflows might taper a bit.

In such a scenario, liquidity will come under pressure in the medium term. However at present, it is comfortable and remains the only push for yields to go down.

Inflation rate, on the other hand, continued to figure at similar levels as last week at 4.2 per cent. The market is of the view that fuel prices are likely to go up after the formation of the government.

Internationally, oil and commodity prices are on an upwards bias. This in turn will result in inflationary pressure, which is a bad omen for the markets.

Another cause of concern has been lack of direction in the interest rate movement, especially after the Federal Reserve's decision to review interest rates on the back of a good job data and deflation ceasing to be risky to the economy.

Liquidity remains in excess as Rs 75-79,000 crore is locked with the RBI under the seven-day repos. While the amount locked in repos will come back to the system in tranches as and when the repos mature, lack of any outflows from the system will ensure comfort as far as liquidity is concerned.

Outflows will be around Rs 1,2000 crore, including Rs 4,000 crore towards treasury bills under the government borrowing and market stabilisation programme. The rest will form a part of the tap sale of the state government loan.

Overnight rates to continue their low run

Call rates are expected to rule lower as there is not much demand for liquidity, primarily because there were no major outflows from the market in the preceding weeks.

With the seven-day repo in place, players were preferring to lend in call and keep themselves liquid . With the interest rate scenario uncertain, the expected volatility in the call rates is less likely.

However with foreign exchange inflows slowing down, apprehending uncertainty in the foreign investment policy of the new government, subscriptions to the repos have waned down to Rs 8,000-9,000 crore against Rs 15,000-16,000 crore earlier.

However along with call., players are also preferring to remain invested in collateralised lending and borrowing instrument of the Clearing Corporation of India which has substantially gained in volumes.

T-bills seen hot

There are four auctions of t-bills slated this week ""- two 91-day t-bills and two 364 day t-bills. While the one 91-day and one 364-day t-bill auctions for Rs 2,500 crore will be held under the market stabilisation scheme, another 91 and 364-day treasury bills worth Rs 1,500 crore form part of the government's borrowing programme.

Both auctions are scheduled to be held on May 26. Market participants are of the view that the cut-off rates on these papers will be in line with market rates and expectations.

In fact, going by the cut-off rates earlier this week, dealers expect this week's rates to be low. Last week, the cut-off rates on the t- bills was pegged higher by maintaining at around 4.40 per cent and dealers attribute it to the fact that there has been too much supply in the short term.

However, market rates have been ruling lower at 4.37/38 per cent for the 91 day t-bill.