All primed for a price rally

OUTLOOK/MONEY MARKETS

Liquidity will be the key factor in the government securities market this week. Participants have regained the confidence in the monetary system with the liberalisation of forex norms announced in the mini budget announced last week.

According to dealers, the moves will ensure the inflow of foreign exchange funds into the country and the domestic expenditure announced will not be at the cost of liquidity.

This week seems primed for a rally, said dealers, as liquidity is abundant and there are no major outflows due except for an on-tap sale of a Maharashtra loan to raise Rs 300 crore on January 12.

The latest inflation number, which stood higher at 5.75 per cent as against 5.65 per cent last week, could act as a dampener meaning there is a possibility of rates going up.

The surplus liquidity in the system has been the result of moves by the Reserve Bank of India (RBI) to keep the rupee under reins amid a depreciating dollar.

But this funds position is likely to be under pressure as foreign exchange inflows, which contributed to the surplus last year, tend to get less concentrated in India as rates have firmed up elsewhere too.

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

A soft run for call rates ahead

Interbank call money rates are expected to rule soft as there is a liquidity overhang in the system with forex inflows expected to increase following the liberalisation of foreign exchange norms, and the intervention activity of the RBI set to suck out excess dollars from the market, thereby adding to the already surplus rupee liquidity.

The rupee is being kept low to make exports competitive, aver some dealers.

Structurally, call rates are ceasing to be the only tool for the RBI to manage day to day liquidity in the system.

Market participants is looking forward to the repo system to be restructured by the RBI as per the proposals recommended in the liquidity adjustment facility report.

Treasury bill auction cut-off seen very competitive

There is one treasury bill auction slated for this week "" Rs 500 crore towards a 91-day treasury bill auction. The cut-off rates are expected to be extremely competitive going by the market yield of the treasury bills.

Last week, the RBI announced a higher cut-off rate of 4.24 per cent for the 91-day bill and 4.37 per cent for the 364 day bill.

Both these cut-off yields were higher than the market yields on paper.

Interestingly, it is observed that the short-term yields as indicated by the treasury bill rates has slipped below the repo rate of 4.5 per cent.

This was one of the reasons why the RBI announced higher cut-off rates in the auction, according to some players.

Dealers seem quite enthusiastic about trading in treasury bills.

They feel there is still good scope for a fall in interest rates in the short end of the maturity scale; this, at a time when the scope for a further decline in the long-term yields look capped.

Apart from the trigger of liquidity, there seems to be few incentives for players to buy gilts and build positions.