Auction to squeeze funds further

Liquidity and dollar movement globally hold the key for the market.

The yield on the ten-year benchmark paper is expected to rule in the 7.45-7.55 per cent range.

The spot rupee is likely to rule in a wide range of 44.10-44.45 per dollar.

The market will be facing liquidity squeeze this week due to the outflow of funds towards the second tranche of 25-basis-point hike in cash reserve ratio.

Since most banks have lent excessively towards the end of the third quarter, it has also affected liquidity. Advance tax outflows will take time to come back to the banking system even as the government released some funds for salary and special deposit scheme (SDS) payments.

While there may be no other major inflows through government expenditure, corporates and banks, having mobilised foreign currency-denominated borrowings in overseas markets, are likely to bring in the proceeds back to the country. The market, therefore, is expecting some foreign inflows in the form of corporate infusion, which may ease liquidity this week.

However, the strain on liquidity will continue to be felt as the Reserve Bank of India (RBI) will absorb around Rs 4,000 crore towards the government auction.

Moreover, the RBI will continue with its intervention both in foreign exchange and the domestic money market in case the situation deteriorates. In the foreign exchange market, while banks are selling dollars to raise rupee resources, the central bank buys dollars from the market to infuse the rupee liquidity. In the domestic rupee market, the RBI will continue to inject liquidity through the repo window "� the liquidity adjustment facility for supplying cash to the system for the collateral of government securities pledged by banks.

CALL RATE
May stabilise at 8-9 per cent

The interbank call money rate may inch up further this week owing to concerns on liquidity. The outflows towards CRR, coupled with auction, may add to the pressure.

Since most of the banks have set aside funds for reserve requirements, additional deposits raised since last week will add to liquidity in the system. Therefore, bankers feel that even as liquidity will be under pressure, it may not nudge up to the highs of 12-15 per cent seen last week. Rather it may stabilise at 8-9 per cent.

Another factor that may lead to liquidity accretion is infusion of rupee by the banking regulator by buying dollars. For the week ended December 29, foreign exchange reserves went up by $1.01 billion. Since foreign exchange inflows have been subdued, market dealers subscribe most of the dollar accretion to dollar buying by the RBI as part of its intervention.

TREASURY BILLS
Demand only on liquidity ease

The RBI will put 91-day and 182-day treasury bills for auction in the market to garner a total of Rs 3,500 crore. Since liquidity in the short term is under considerable strain, it may reflect in the cut-off yield for t-bills.

The demand for t-bills was likely to show up once the liquidity problem eased, said a foreign banker. Foreign banks have been buying t-bills as part of investments as well as providing securities for entering into repo transaction with the RBI to avail of liquidity. The t-bills are a favoured tool as they do not require to be marked for valuation purpose. Mark-to-market is the exercise where investments are valued on the basis of daily price movements.

Recap: The annual rate of inflation for the week ended December 23 increased to 5.48 per cent against 5.43 per cent in the previous week. The rise in inflation rate is attributed to increasing index of manufactured products, which relates to a hike in prices of food products, textiles, rubber, plastics and chemicals.

GOVERNMENT SECURITIES
To rally on lower borrowings

The government securities market is expected to get into a rally mode since the government has scaled down the size of borrowings to Rs 4,000 crore from Rs 9,000 crore earlier.

The rally will, however, be restricted in the beginning of the week, and then the market is expected to be rangebound. Since the central bank will reissue long-term paper for the auction, the market is not expected to trade the paper much since the target for the paper is insurance companies.

Even as liquidity was under pressure and auction would further heighten the strain, the fact that the auction amount had been brought down indicated RBI's concern over market conditions, which was comforting, a dealer said.

With the Life Insurance Corporation having raised the target for premium collection, bankers are hopeful that demand for gilts may go up for life insurance corporations for investments.

Since the yield on government securities has been ruling higher, the market may witness value buying by banks, both for SLR requirements towards rising deposits and for tendering securities under the repo facility.

In this backdrop, the yield on the ten-year benchmark paper is expected to rule in the 7.45-7.55 per cent range.

Recap: Trading in the government securities remained highly rangebound and lacklustre, apprehending the announcement of the scheduled auction last week. The trading was mostly restricted to the benchmark securities in the medium- and long-term papers.

CORPORATE BONDS
PFs' demand o continue

The Bombay Stock Exchange (BSE) launched its reporting platform corporate debt market last week. The debut session witnessed trading volumes of around Rs 150-200 crore.

According to sources, the reporting platform will be extended to trading platform. It is one of the steps for developing the corporate debt market. Till now, most of the deals in the corporate debt market were off-market and struck as bilateral deals.

The Power Finance Corporation (PFC) and Exim Bank are likely to issue bonds for raising resources, but by the month-end. With increase in the forward premiums on dollars, the swap cost to convert foreign currency borrowing into rupees has shot up.

Therefore, market dealers expect most of the corporates to tap the rupee market to raise resources rather than venturing overseas.

The secondary market will continue to witness buying demand from provident funds, particularly in oil bonds. Mutual funds, which form the other set of buyers, are likely to lie low since they have witnessed redemptions from corporates for paying advance taxes.

Recap: The corporate debt market continues to remain illiquid. The spread between the triple-A paper and underlying government securities for 10-year maturity widened to 120 basis points as against 75-80 basis points earlier. Oil bonds were the favourite of the insurance companies due to attractive interest rate differential with the government securities of corresponding maturity.

RUPEE
Gains likely

The spot rupee is expected to rule with a bias towards appreciation. This is irrespective of the strengthening of the dollar against major currencies overseas. The US data released last week have been dollar bullish and the currency has already appreciated against major currencies last week.

However, in a reversal of the trend, the yen has been appreciating against other currencies, primarily on the back of unwinding of carry trades. While cross currency movement of the yen will prop up the dollar, the activities in the domestic market will be equally important. The banks will continue selling the dollars for raising rupee resources.

Most of the corporates that have raised resource overseas are expected to bring in their proceeds to India. This include external commercial borrowings and funds raised through bond issues by banks. Under the new guidelines, banks are allowed to raise around 50 per cent of the tier-I capital in overseas markets.

Oil prices, on the other hand, have come down to around $55.59 per barrel. Oil companies may not rush to buy dollars.

The forward premiums, on the other hand, will continue to rule firm since the strain on rupee liquidity may surface this week as outflows towards second tranche of CRR hike will start.

The impact will be seen mostly on the near-term premiums of one and three month rather than the far end. However, with the appreciation of the rupee against the dollar, exporters will be seen selling dollars in the near term so as to avoid losses in realisation of their proceeds.

The cost of rupee funds affect premiums since booking forward dollars require banks to pay premiums in the form of rupees which have become expensive following the liquidity tightness.

In this backdrop, the spot rupee is expected to rule in a wide range of 44.10-44.45 against the dollar.

Recap: Even as the dollar appreciated against major currencies globally, the spot appreciated since banks sold dollars to raise rupee resources . The rupee premiums to be paid for booking forward dollars went up due to the liquidity tightness.