CRR hike set to strain liquidity

WEEKLY MONEY & CURRENCIES

Liquidity: Outflow blues
The market is reeling under a serious liquidity strain. This is because around Rs 30,000 crore is slated to flow out of the market this week, including around Rs 17,000 crore towards the hike in the cash reserve ratio (CRR).

The CRR hike comes into effect from November 10. Inflows from foreign investors may slow down as they will be busy booking profits to close the calendar year.

The market will witness an inflow of Rs 828 crore as against an outflow of around Rs 30,000 crore.

Call rates: May rise
Call rates are expected to inch up after the outflow towards the auction of treasury bills and government securities and provision for the CRR. "By November 8, call rates will rule around 7-8 per cent," said a dealer.

T-bills: Firm yields
RBI will auction the 91- and 364-day treasury bills for Rs 3,500 crore (Rs 3,000 crore for MSS) and Rs 3,000 crore (Rs 2,000 crore for MSS).

The cut-off yield on the T-bills is expected to firm up since the liquidity may tighten due to higher outflows slated during the week. Increased demand for T-bills will be seen in the secondary market from banks and mutual funds.

Corporate bonds: To remain sluggish
The corporate bond market will remain sluggish till the outlook on the interest rates gets clearer and concern on the liquidity eases.

The demand for short-term certificates of deposit (CDs) and commercial papers may go up since the interest rate differential with the benchmark treasury bills will widen.

G-sec: New auctions
The trading sentiment in the government securities market will be cautious.

There may not be much demand for these papers as well since the supply is quite strong due to issuance of short-term, dated securities and treasury bills under the Market Stabilisation Scheme (MSS) to absorb excess liquidity.

RBI will auction two dated securities "" 8.20 per cent 2022 for Rs 5,000 crore and 8.33 per cent 2036 for Rs 3,000 crore "" under the government borrowing programme.

In this backdrop, the yield on the ten-year paper is likely to rule in the range of 7.85-7.93 per cent.

Rupee: May weaken
The spot rupee is expected to rule with a bias towards depreciation. Dealers see the equity market poised for a correction after the Sensex trades above the 20,000 mark.

Crude oil prices nearing $100 a barrel is another concern that may weaken the rupee. Rising oil prices impact the spot rupee indirectly due to a widening trade deficit as oil accounts for a major part of imports.

Post-script: RBI further raised the CRR by 50 basis points to 7.50 per cent with effect from November 10.