Auction cut-off to steer market

Gilt auction cut-off yield, oil prices and capital market movements will be the key factors; The spot rupee is likely to rule in the 44.90-45.10 range against the dollar; The ten-year gilt is expected to stay between 7.25 per cent and 7.45 per cent.

LIQUIDITY
RBI to float t-bills

The Reserve Bank of India (RBI), after a span of five months, decided to float treasury bills under the market stabilisation scheme (MSS ) for liquidity management. This is sufficient to suggest that the market is flush with funds.

According to dealers, the going has been good in April. However, with the government's borrowing programme in full swing and MSS at play, the surplus liquidity may no longer be a reason for the bond market player to cheer. Moreover, the market has already started discounting a reverse repo rate hike in the coming quarterly policy of the RBI.

Oil prices remain a concern and may push up the yields during the week. Besides, it might also impact the outlook on inflation rate which till now has remained benign.

This week the market expects an inflow of Rs 1,730 crore as against an outflow of Rs 12,500 crore towards the government borrowing and treasury bill auctions.

MONEY MARKETS
May not cross 5.5%

Call rates (rates at which banks borrow and lend for daily fund requirement) will continue to rule in the range of 5.5-5.75 per cent. Dealers said, it was unlikely to breach the reverse repo rate of 5.5 per cent.

However, the mood might get sombre as auction nears when banks would prefer to stock up liquidity with rates moving up a bit.

TREASURY BILLS

The government will auction 91-day and 182-day t-bills for Rs 1,000 crore and Rs 1500 crore, respectively. However, this time the notified amount forms part of the government borrowing programme as well as the market stabilisation scheme. In 91-day t-bill, Rs 500 crore will get absorbed towards the borrowing programme and the rest goes towards the MSS.

Similarly, in 182-day t-bill, MSS and borrowing programme makes up for Rs 500 crore each. The cut-off yield is expected to be slightly higher than that figured last week, said dealers.

Recap: Last week, the RBI, for the entire week absorbed about Rs 60,000 crore from the market. Inflation rate for the week ended April 15 ended at 3.55 per cent, higher than 3.24 per cent a week earlier, due to higher energy and manufactured product prices.

GILTS
Auctions on May 4

The cut-off yield of government papers to be auctioned as part of the public borrowing programme will be crucial for the market sentiment.

The government will reissue 7.59 per cent 2016 paper and 7.50 per cent 2034 paper for a notified amount of Rs 6,000 crore and Rs 4,000 crore, respectively, to be auctioned on May 4.

According to dealers, the ten-year paper will be highly subscribed by the market as there is not enough stock of the paper which is considered the benchmark security.

The 28-year paper, on the other hand, is likely to be picked up by players in long-term papers such as pension funds, provident funds and insurance companies.

Globally, moreover, rising yields of the US treasury bonds, oil prices and Fed Reserve's stance on whether or not to continue with further increases in the base rate will affect the market sentiment, depending on what precedes in the series of events.

To this effect, the next Fed meeting will be significant, said dealers. In his backdrop, the ten-year paper is expected to rule in the 7.25-7.45 per cent range.

Recap: The gilt market remained bearish last week due to higher oil prices and rising yields of the treasury bonds in the United States. Active trading was however seen in the short term papers.

CORPORATE BONDS
Banks, PSU floats likely

In May, banks and public sector undertakings are planning to tap the market for funds. Some of them are expected to enter the market this week while others will wait for a cue from others to decide the interest rate on the bonds, said dealers.

However, the market is not quite comfortable with the hybrid bond structures since it is perpetual debt and payment of interest and principal is contingent upon the fact that capital adequacy of the bank remains at nine per cent or above.

Till such time, CPs for the corporate sector and certificate of deposits for banks remain constant source of funds.

Recap: The spread between the five-year triple-A rated corporate bond and the underlying government security continues to be 90 basis points.

For the week ended April 15, 1,423 CPs worth Rs 12,948 crore were issued. The number of CDs rose from 3,442 last fortnight ended March 17 to 9,028 on March 31 and the funds raised stood at Rs 43,568 crore.

CURRENCY
Equity movement key

The domestic equity market is expected to continue the sterling show. This will attract more foreign exchange to the market. Besides, the Asian currencies are likely to strengthen against the dollar.

This is because in the recently held meeting of the G7 countries, renewed concerns were raised on the widening US trade deficit.

The woes were further alleviated with the government of Qatar and Sweden proposing to shift their foreign exchange reserves from the dollar. The dollar reached an almost three-month low of 114.55 to the yen. This could prop up the local currency against the dollar in a cross currency movement.

After the shake up in the equity market last week, it is expected that the fervour will resume this week. The entrants who might have exited last week will re-enter via value buying.

With the bearish outlook on the dollar, exporters might prefer to realise at least their near term-receivable will thus add to further dollar supply in the market.

The premium on forward dollars is likely to be continue soft with the liquidity situation comfortable. The dollar demand is not expected to be high with the month coming to a close.

Oil prices may play spoilsport which might force market players to book dollars for at least near term of 1- 3 months. In this backdrop, the spot rupee is expect to open in the range of 44.90-45.10 against the dollar.

Recap: The spot rupee lost last week to close at a low of 45.02/03 after opening at a high of 44.85/90 against the dollar. The market was caught short as the equity market fell and there was demand for dollars.

On the other hand, the foreign exchange inflows slowed for a while .

The month-end demand from the importers also added to the pressure. Forward premiums, on the other hand, continued to ease with improvement of liquidity.