The interest rates in the inter-bank overnight lending market are likely to remain steady, on persistent strain on liquidity in the system and the hike in short-term interest rates.
Bank treasury officials said improvement in liquidity conditions is expected. The money which went out of the system to government coffers as payment of advance tax and telecom spectrum fees would come back in the form of spending. But the tightness is still being felt as expenditure has not seen much increase.
Last week, though the liquidity situation remained tight money markets rates were stable. On Friday, RBI infused Rs 56,625 crore under liquidity adjustment facility (LAF) repo operations, compared to Rs 49, 530 crore a day before. The overnight call rate moved in the range of 5.50-5.75 per cent.
Despite the pressure on cash levels, short-term rates in the market may not rise. Banks will prefer to borrow at a repo rate of 5.50 per cent from LAF.
A money market dealer with public sector bank said the call rate moved up due to the 25-basis point hike in repo and reverse repo rates on July 2. It signalled a hardening of key rates to check inflation expectation by the central bank. On the same day, RBI also extended the additional liquidity support measures — second liquidity adjustment facility and relaxation in SLR norm — till July 16.
Bond yield to remain firm
The yield on government bonds is expected to remain firm, ahead of the industrial output growth data to be released.
The RBI rate action has partly contributed to rise in yield on securities, dealers said..
On Friday, the bonds opened lower following movements in US Treasury markets. A higher than expected cut-off yield for benchmark paper (7.80 per cent government bond 2020) at auction also impact the prices.
The yield benchmark 10-year paper increased 5 basis points, to close at 7.65 per cent.
