Capital inflows on cards

MONEY MARKETS

The system will be flush with liquidity with a possible surge in capital flows through proceeds of external commercial borrowings and American depository shares raised by corporates and banks.

Funds absorbed through excise collections last week are expected to stage a comeback through government expenditure.

Inflation rate is likely to moderate further on the back of base effect. Market players expected the rate to hover in the 4.75-5 per cent range by the fiscal end.

Inflows and outflows are almost matching this week. While there will be an outflow of Rs 4,000 crore on account of the auction of 91-day and 364-day treasury bills, a similar set of T-bills are maturing along with Rs 77.40 crore of coupon redemption.

Call to stay subdued

Call rates, the rates at which banks lend and borrow funds for daily requirement, are expected to rule easy amid abundant liquidity. There might be some pressure towards the weekend when banks will rush to cover their reserve requirements for the reporting Friday.

The downward pressure on call rates will be aided by forex inflows and rupee liquidity infused by the central bank in its effort to depreciate the rupee vis-a-vis the dollar.

Auction cut-off seen lower

Two sets of treasury bills, 91-day and 364-day, will be auctioned this week for Rs 2,000 crore each.

The auctions are expected to be cleared at market-related cut-off. The cut-off, in turn, is likely to be lower than last week's cut-off rates, given the dip in T-bill yields in the secondary market.

The secondary market is likely to witness brisk trades in T-bills from banks and their custodian clients.

"With the premium on forward dollars coming down, swapping dollar funds into rupees to invest in T-bills offers good arbitrage opportunities," said a dealer.

The premium on forward dollars has been coming down following increased pressure to buy spot dollars as the market apprehends a cash dollar shortage .

Recap: Call rates moved in the range of 4.65-75 per cent during the week with reverse repo bids averaging Rs 8,000-13,000 crore.

The 91-day treasury bills were auctioned last week at a cut-off yield of 5.23 per cent. The flow of liquidity towards the end of the week declined owing to excise collections.