Auction, advance tax outgo to end liquidity surplus

Liquidity
Surplus unlikely

Liquidity will remain comfortable this week, but the surfeit seen last week may not continue.

"The liquidity is a short-term aberration. The surfeit of liquidity was the result of the redemption of the 11.90 per cent 2007 government security and the rumoured intervention of the RBI in the foreign exchange market. There are not many avenues for deployment since the RBI has capped its limit for absorbing funds under reverse repo at Rs 3,000 crore. Auction of dated securities and higher market stabilisation scheme (MSS) amount, coupled with the advance tax outflows slated around June 15, will balance out the excess liquidity," said R V S Sridhar, head, markets, UTI Bank.

While the domestic liquidity is in a passing phase, a more consistent flow of liquidity is expected from the foreign exchange market. Inflows from both direct investments and portfolio investors are lined up, according to dealers.

This week will witness an inflow of around Rs 886 crore against an estimated outflow of Rs 21,500 crore.

Call rate
May rise to 3-4%

The call rates may inch up to rule around 3-4 per cent. This is because the liquidity-tightening measures announced by the RBI may suck out some portion of the funds from the market. The banks will have to set aside funds for participating in the auction and for advance taxes to be paid on June 15.

Treasury bills
Auctions on cards

The RBI will auction the 91-day and the 364-day t-bills in the market to raise Rs 6,500 crore, both as a part of the government borrowing programme and liquidity absorption tools to tackle inflation under the MSS. This time, the amount of t-bills to be auctioned under the MSS in both the 91-day and the 364-day t-bills has been doubled from Rs 2,500 crore to Rs 5,000 crore as a part of the liquidity-tightening measures.

The cut-off yield in both the t-bills is likely to be higher than the market yields, reflecting the sentiment, which has been bearish with these announcements. There has been a brisk demand for t-bills from foreign institutional investors.

Recap: The call rates consistently remained below the RBI funding rate of 7.75 per cent and eventually fell below 1 per cent during the weekend due to surfeit of liquidity in the system. The Clearing Corporation of India had to floor its rate for lending funds under the CBLO at 0.10 per cent.

Government securities
Rush for gilts

The RBI has announced an enhanced amount of bonds and treasury bills under the MSS in an attempt to suck out the excess liquidity from the system. While the amount under the treasury bill auction has been doubled from Rs 2,500 crore to Rs 5,000 crore, additional bonds of Rs 6,000 crore will be auctioned under the MSS.

However, dealers feel that the liquidity may not be tight, if not surplus as seen during the last week. This will prevent a sharp firming up of the yield. The demand for securities will go up as it is expected that liquidity may become tight in the days following the advance tax outflows. This is because the securities may be used to borrow from the RBI under the repo route.

In this backdrop, the yield in the ten-year benchmark yield is likely to rule in the range of 8.09-8.15 per cent.

Recap: Paradoxically, the gilt yield remained rangebound even as the liquidity in the market was abundant. Even when the market was surplus of liquidity to the tune of Rs 30,000 crore, the yield of the ten-year benchmark paper ruled in the band of 8.09-8.13 per cent.

Corporate bonds
PFC issue likely

The Power Finance Corporation (PFC) issue to raise around Rs 500-600 crore is likely to open this week. The public sector undertaking is offering 10 per cent for five years.

According to dealers, banks will get a triple-A paper in their portfolio, but may not earn any big spread as interest rate differential. The yield curve in the corporate bond market is virtually flat since one-year certificate of deposits (CDs) and commercial papers are trading in the range of 9.90-10 per cent. There is a greater interest for short-term papers as there is not much difference in the yield between short- and long-term bonds. Short-term papers carry less risk during interest rate fluctuations. Foreign institutional investors have already exhausted the limit of investing in corporate debt and government securities, mostly in the short-term segment, and have now applied for additional limits from the regulator.

Recap: The spread between the 10-year government security and a triple-A corporate bond of similar maturity continued to rule around 150-160 basis points. Mutual funds continue to invest in short-term papers such as CDs and CPs.

Rupee

Resistance at 40.50 The rupee, though poised to appreciate following heavy dollar inflows, may find tough resistance to breach the 40.50 level on the upside. The Reserve Bank of India is likely to intervene aggressively to protect the 40.45-40.50 level, according to market dealers.

The dollar inflows are likely to come in the form of both portfolio and direct investments. Dealers maintained that custodian banks (banks with foreign institutional investors as clients) were seen as big sellers of the dollar in the market.

On the other hand, even if the dollar demand from the oil companies may not be substantial since month end is over, public sector banks are likely to be active buyers of dollars on behalf of the RBI as part of intervention to check the rupee appreciation.

Since the rupee liquidity will remain ample in the coming week as well, the premium to be paid for booking forward dollars is likely to remain low .

There might be demand for importers to book their requirements for the near term of one to three months so as to take advantage of the low premiums. This is because the tightness in liquidity is likely to be back once the advance tax outflows are over by June 15 which might push up premiums. In this backdrop, the spot rupee is expected to rule in the range of 40.40-40.80 to a dollar.

Recap: The spot rupee remained rangebound in a band of 40.50-60 during the week after it rose to a fresh nine-year high of 40.28 in the beginning of the week.

The central bank intervened in a big way last week which prevented the rupee to breach 40.50 on the upside. Forward premiums on dollars came off substantially following comfortable liquidity.