Capital inflows to continue

OUTLOOK: Money markets

Fresh capital inflows on account of proceeds from external commercial borrowings (ECBs) and depository receipts are expected to boost liquidity in the banking system during the week. Inflows from foreign institutional investors might, however, take a backseat.

The daily liquidity scenario appears comfortable but players are sceptical about the long term. "The new fiscal year has started with banks building up their portfolio. Hence, the extent of surplus liquidity might get stuck in investments," said a banker.

Inflows this week will Rs 3,056 crore, while outflows will be Rs 4,000 crore. Given the current liquidity situation, outflows could be easily met.

Auction may stiffen rates

Inter-bank call rates, on the basis of which banks borrow and lend funds daily, will be hovering around 5 or 5.10 per cent.

With an auction scheduled for the week and banks showing renewed interest in government securities, call rates might stiffen a bit during the auction period.

Reverse repo bids might increase with additional foreign exchange inflows hitting the domestic shores.

Cut-off seen lower

Treasury bill auction of Rs 4,000 crore is scheduled for the week. T-bills of 91-day and 364-day will be issued for a notified amount of Rs 2,000 crore each, and will be a part of the government borrowing as well as market stabilisation programme.

The cut-off yield at the auction is expected to be lower owing to brisk trading in this segment. Most public sector banks are expected to continue with their interest in treasury bills as they are wary about long-term interest rates.

Recap: Liquidity was tight last week with reverse repo subscription bids reducing to Rs 1,500 crore from a high of Rs 8,000-9,000 crore on account of advance tax flows. Call rates moved in the range of 4.6-5 per cent. Treasury bills was, however, the flavour of the week owing to their short tenure and high yield.