Auctions to set the tone

MONEY MARKETS

Liquidity squeeze to continue

Liquidity would continue to be under pressure. Players will watch out for the cut-off yields at Tuesday's auctions before deciding on taking any additional positions. The Rs 8,000 crore auction will also gauge investor appetite.

A dealer with a public sector bank says the auction might not sail through unless the government begins spending from Monday. Traders expect to see at least Rs 20,000 crore being mopped up by the RBI invoking the reverse repo liquidity adjustment facility. This might improve the liquidity situation, say market analysts.

The Reserve Bank of India has announced the auction of 364-day government of India treasury bills for a notified amount of Rs 2,000 crore. Of this, Rs 1,000 crore would be under the regular auction calendar and Rs 1,000 crore under market stabilisation scheme (MSS).

RBI has also announced the auction of 91-day T-bills for a notified amount of Rs 2,000 crore (Rs 500 crore under the regular auction calendar and Rs 1,500 crore under MSS.

Calls to open lower

Call rates are expected to open at lower levels on Monday. A large state-owned bank, which had been a borrower for a large part of the previous week, is unlikely to continue doing so as the government spending would be channelised through the bank. Hence, this would leave behind a considerable amount of liquidity in the system.

Although inflation has shown a downward movement, the tightness in the liquidity market, the credit pick-up and the loss of appetite for bonds are likely to have a telling impact on the inflation rates this week.

Traders are also worried about price pressures. With local fuel prices still not feeling the impact of rising global oil prices, the inflation risks due to increased demand remain high.

Recap: Inflation data released on Thursday showed a surprisingly benign annual WPI inflation reading of 4.49 per cent in the week ending Oct 22, as compared to 4.71 per cent in the preceding week. US light crude oil prices were at $61.20 a barrel on Friday.

Costlier oil has rekindled concerns about faster inflation as India imports 70 per cent of its oil. In the beginning of the previous week, call rates ruled higher because of banks making excess provisions due to Diwali and Eid. Liquidity too was tight because of cash withdrawals on account of the ongoing festive season.

The cut-off yield on the 91-day T-bill fell to 5.69 per cent from 5.57 per cent a week ago. The yield on the 182-day T-bill stood at 5.79 per cent in the week under review. At the close of the week, around Rs 6,785 crore stood at the RBI's reverse repo window, under the liquidity adjustment facility.

CORPORATE BONDS

Lacklustre trade seen

Volumes in the corporate bond market will be extremely thin and lacklustre, said a dealer with a private sector bank. With liquidity continuing to remain under pressure, players would be wary of taking any fresh positions. However, the spreads are expected to widen by another 5-7 basis points.

GOVERNMENT SECURITIES

Outlook bearish

The government securities market will largely be bearish in absence of positive triggers in the market. There is nothing positive about government bonds with the rupee weakening and oil prices ruling above $60 a barrel, said a dealer at a large state-owned bank.

The 10-year government stock having a coupon rate of 7.38 per cent, which was highly illiquid last week, is likely to open beyond 7.10 per cent taking cues from the forthcoming fresh issuances and scaling of oil prices.

Even as the g-sec market has been largely range-bound with a bearish undertone, it will gain some direction only after the auction slated for Tuesday, say dealers. However, the fresh issuances would have uniform-based pricing making the bidding process more attractive.

This would help the ailing government bonds to recoup some losses. Traders see long-term investors like mutual funds showing good interest in the 12-year stock, to be sold through a uniform-price auction.

The market has been shallow with narrow trades and dealers expect this trend to continue in coming weeks. "With fed rates having risen to 4 per cent and set to rise further and domestic inflation rising in a sustained pace, investors are hesitant to hold long-tenor bonds," says another dealer.

As we move towards December, the yields are expected to harden further on account of a temporary liquidity crunch caused by IMD redemption.

CURRENCY

Rupee to stay weak

The rupee, although will shrug off several month lows, will remain weak on account of strengthening of the dollar in the overseas market. The rupee will come off 43.50 mark to trade in the band of 43.25/40.

The US pay-roll data, which was unveiled on Friday, will have an effect on the dollars movement this week. However, analysts maintain a bearish outlook on the local currency on account of a burgeoning trade deficit, narrowing interest rate differential between the US and India, and a deceleration in capital flows into the local equity market.

The dollar has steadily gained this year on the back of a widening yield advantage, which was further raised with Tuesday's interest rate increase by the US Federal Reserve. And the dollar seems set to get stronger as we step into a new year, which will further weigh on the rupee say dealers.

In the forward segment, the premiums is likely to witness a movement of 10-15 paise. There will be some receiving pressure on near-term premiums. Any major movement in the forward segment is possible only after December once there is some fresh demand from investors.

Recap: The rupee, which began the week at 45.15 per dollar breached the 45.50 mark to touch one month low of 43.53/54. This was partly because of the fact that amid thin trades during last week even small demand from traders weakened the rupee considerably.

Although a strong dollar, backed by a rise in Fed Rate to 4 per cent, in the overseas market has seen a significant fall in the rupee despite a recovery in local stock market indices.

The six-month forward premium, softened a tad to end the week at 0.36 per cent while the 12-month premium ended the week at 0.38 per cent.