All eyes on Mint Street rate move

OUTLOOK: Inflation may stay moderate; oil prices a concern

LIQUIDITY
Rate concerns key
Liquidity will be comfortable. The crucial factor will be the Reserve Bank of India's (RBI) decision on rate hike. The government has already started spending but it is expected to increase this week as well.

Anticipating an inflationary pressure on the economy, the government's spending had suffered a set back in the last few weeks even as it sucked out funds from the system through advance taxes and government borrowing, said a dealer.

On the other hand, inflation for the week is expected to be moderate with the base effect of the last year, said a dealer. Rising oil prices, however, remain a concern.

CALL RATES
Pressure seen easing
Call rates, rate at which the interbank players lend and borrow funds for daily market operations, are expected to rule easy after two weeks of volatility. Rates reached a high of 6 per cent due to tightness in the liquidity situation following decline in the government expenditure.

However, while the government accounts run in surplus with the RBI, the MSS has around Rs 70,000 crore which could be rolled back, if need be.

TREASURY BILLS
Cut-offs to be realistic
There are two sets of treasury bills to be auctioned this week. Both 91-day and 182-day t-bills will be issued for Rs 2,000 crore and Rs 1,500 crore each. While 91-day t-bill will be auctioned for Rs 500 crore for the government's borrowing programme, another Rs 1,500 crore forms part of the market stabilisation scheme (MSS).

Similarly, in 182-day t-bill, as much as Rs 500 crore will be sucked out for the government borrowing programme followed by another Rs 1,000 crore towards MSS. The cut-off yields are expected to be market related.

Recap: Call rates ruled soft with liquidity rising from Rs 3,500-4,000 crore the week before to a high of Rs 19,000 crore last week. Inflation for the week ended July 9 was at 4.13 per cent as against the market expectation of 4 per cent.

CORPORATE BONDS
Borrowers await rate decision
Many a banks and public sector corporates are likely to hit the primary corporate bond market for their borrowing programme.

However, what is crucial is the certainty in the benchmark rates which continues to remain firm with apprehension of reverse repo rate hike this week. After the July review, once the direction of the interest rate is known, the borrowers may start tapping the market, said a corporate bond dealer.

The secondary market will track the government securities market, however, the demand for corporate bonds will continue to be strong. The demand is basically emanating from insurance companies and mutual funds which are surplus with subscription.

Commercial paper continues to be abuzz with activity. Perceiving an uncertainty in the long-term interest rates, the corporate sector seems to be preferring to borrow through commercial paper.

MFs, on the other hand, to enhance their returns are preferring to invest more in CPs, which fetches better return than just focusing on underlying treasury bills.

Recap: The corporate bonds market remained lacklustre last week as there was no major buying demand. This followed the choppiness in the government securities market that acted as a benchmark for the corporate bonds was also choppy. As on July 15, a total number of 1,896 commercial papers were issued amounting to Rs 18,022 crore.

GILTS
Prices hinge on rates
The RBI will be unveiling its first quarterly review of the economy this week. The market is divided over whether or not the RBI will hike the reverse repo rate.

If a rate hike happens, then the government securities prices will crash with yields moving up. If there are no changes in the rate structure, then the price may move up sharply.

However, if the RBI does not change the rate structure and prefers to warn the market of an upward rising rate scenario, then the rally in the prices will be cut short.

In this backdrop, the ten-year benchmark 7.38 per cent 2015 is expected to rule within the range of 7.05-25 per cent. With a rate hike, it may even touch 7.30-35 per cent as a knee-jerk reaction.

Recap: Government securities' prices remained rangebound even with the impact of the yuan revaluation. Even as the market took comfort from the fact that export will be competitive and trade deficit to that extent could be bridged, the apprehension of a reverse repo rate hike acted as a dampener.

RUPEE
RBI to keep a check
The spot rupee is expected to be bullish with an inclination for appreciation over the week. However, the RBI's intervention to check appreciation of the rupee is likely to keep the rupee rangebound within 43.30-50 to a dollar.

Besides getting aligned through cross currency movements to the other Asian currencies which are on an appreciation mode, the rupee-dollar exchange rate will be supported by dollar sales by exporters. Portfolio investments of FIIs will add to further appreciation of the equity market.

According to Partha Mukherjee, head-treasury, UTI Bank, the rupee is poised to gain and breach the 43 mark but for the RBI's intervention.

Going by the market forces, the rupee should be stabilising at 42.75-43.10 to a dollar. However, the RBI, through dollar buying by PSU banks, will force it to rule in the range of 43.45/60 to a dollar.

FORWARD
$ premiums to dip
Premium on dollars will continue to go down with exporters selling at 43.30-50. This is because the spot rupee band is being managed to prevent a rapid appreciation that happened last week. Therefore, in order to take advantage, exporters will try to book their receivables at every dip in the rupee-dollar exchange rate.

However, the counter pressure will emanate from the banks who had earlier sold at the 43.50-70 levels. These banks will cut their positions and rebook them in line with current rates.

Recap: The spot rupee remained rangebound throughout the week in the 43.50-60 range to a dollar with supply and demand of dollars matching perfectly.

All hell broke loose with China revaluing the yuan which led to the spot rupee touching a six-year high of 43.15 to a dollar. Premia on the forward dollars fell as panicky exporters sold the currency.

POSTSCRIPT
The Chinese Central Bank pegged the yuan to basket of currencies and devalued it to 8.11 from 8.28.