10yr yield likely to rule in 5.13-5.16% band

OUTLOOK/MONEY MARKETS

Liquidity will remain abundant and this time it is not the only cause for cheer "" there will be the element of lower inflation at 5.32 per cent too.

Some riders to the rally exist, though, in the form of huge outflows and open market operations by the Reserve Bank of India (RBI).

The much-expected launch of market stabilisation bonds is said to have been postponed for the time being and will form a part of the borrowing programme for the new fiscal as per the statement of D Swarup, expenditure secretary to the government.

The banking system currently has surplus cash of over Rs 50,000 crore. Outflows from it this week will be around Rs 9,500 crore.

Of this, Rs 1,500 crore will be towards treasury bill auctions, and Rs 8,000 crore as advance taxes.

Even if the RBI comes out with a couple of open market operations through issue of existing securities, there will still be positive net liquidity. In addition to the existing liquidity, the RBI's sterilisation activity (which leads to more rupees entering the system) to prevent the rupee's appreciation is going to increase in the coming weeks.

This is because, foreign institutional investors that have participated in the ongoing government disinvestment programme will bring in the dollars. This will, in turn, add to the rupee liquidity.

According to a market analyst, given the extent of last week's rally and with state-run banks unlikely to buy ahead of the fiscal year end, the yields are expected to move into a steady range. The 10-year yield is seen consolidating around the 5.13-5.16 per cent levels this week. The benchmark bond eased nearly 4.5 basis points last week to close on Saturday at 5.1836 per cent, its lowest weekly finish since January 24.

Call rates to continue in easy zone

The inter-bank call money rates are expected to rule at lower levels as there owing to no demand for funds. This is because outflows from the market have been inconsequential in the past few weeks.

However, some intra-day volatility is likely. Rates, which had stayed comfortable for a major part of last week, firmed up towards the end due to a sudden call for cash from traders. After participating heavily in the bond market rally, they had fallen short on funds to square off their positions.

That the rates are at comfortable levels is further endorsed by the repo subscriptions that continue to flood the window. The average daily volume crossed Rs 50,000 crore last week and led to new records in subscription.

Treasury bills

There are two treasury bill auctions scheduled this week "" a 91-day bill for Rs 500 crore and a 364-day bill for Rs 1,000 crore, on March 17.

Dealers are of the view that the cut-off rates on these papers will be lower in line with the market rates and expectations.

Last week saw buying interest from all segments of the market especially from mutual funds and primary dealers.

With the outlook on long-term interest rates a bit blurred in the short term and the equity market in correction zone, the treasury bills market was very active.

So much so, the 91-day paper became the most traded security last week.