The liquidity abundance story continues

OUTLOOK/MONEY MARKETS

Liquidity will be abundant in the banking system this week despite an outflow of Rs 1,500 crore against an inflow of Rs 1,270 crore.

Nevertheless, dealers feel it's time to take stock of liquidity. This is because the stabilisation bonds issue is round the bend, which will suck out cash "" and the abundance script will change if foreign exchange inflows taper too.

The surplus liquidity in the system has been a result of the sterlisation activity of the Reserve Bank of India (RBI) to keep the rupee from appreciating against the dollar.

The inflation rate is relatively low at 5.63 per cent, which will help improve sentiment. Interestingly, there is another angle to the liquidity story.

A section of analysts say liquidity is likely to be under pressure this year as foreign exchange inflows, which have contributed to the surplus liquidity in the banking system during last financial year, may come down as interest rates firm up elsewhere across the globe.

Moreover, with good economic data, growth is expected to be high and this will get reflected in high credit growth.

Call money rates seen at easy levels

The inter-bank call rates are expected to rule soft owing of the liquidity overhang in the banking system.

Even though the forex inflows have become moderate, the intervention activity of the RBI to suck out excess dollars from the market has been adding to the already surplus rupee liquidity in the market.

The rupee is being made to lose in order to make exports competitive, a dealer said. Structurally, call rates are ceasing to be the only tool for managing day to day liquidity in the system.

Participants are looking forward to the repo system being restructured by the RBI as per the proposals recommended in the liquidity adjustment facility report.

Many options have been discussed in the report including a 7-day repo and setting up of market stabilisation fund under the government account, which will issue tradable securities to make up for the shortage of gilts with the RBI for monetary management.

Treasury bill cut-offs expected to be competitive

There are two treasury bill auctions slated for this week "" for Rs 1,000 crore of 364 day treasury bills and Rs 500 crore towards 91-day bills.

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

Currently, treasury bill yields are ruling softer than usual. While the 91-day paper is at 4.29/30 per cent, the 364-day bill is ruling around 4.37/38 per cent.

Dealers seem to be quite enthusiastic about trading in treasury bills as they feel there is still a lot of scope of an interest rate fall at the short-end of the maturity scale.

This is because with the year coming to a close and advance tax outflows round the corner, most of the bond market players prefer to remain liquid.

Therefore they have been investing in treasury bills so as to exit and earn a better returns on their investments compared with the investment done in long-term gilts.