Crude still a concern, Re to rise

OUTLOOK

Oil prices, liquidity to remain key to the market; The benchmark 10-year paper may stay in the 6.99-7.04 per cent range; The spot rupee is expected to move in the 43.85-44.20 band against the dollar.

LIQUIDITY
Rs 23000 crore inflows seen

Liquidity is expected to be in surplus as cash worth Rs 23,000 crore is likely to flow into the system. The prevailing liquidity of around Rs 25,000-30,000 crore will provide the ample support.

The equity market is likely to attract some foreign exchange inflows which may form fresh allocation after the correction, some dealers said.

Outflows will be on account of the government's borrowing of Rs 8,000 crore through dated security auction and Rs 5,500 crore towards the treasury bill auction.

The inflation rate is likely to continue to be moderate for sometime following the base effect but with a rider. Analysts feel that this will be the right time for the government to hike oil prices. This is because its impact on the inflation will be partly absorbed by the base effect.

While oil prices continue to remain a major concern, there is another comforting factor for the domestic financial markets.

Following a slew of weak economic data from the United States and the devastating effect of the hurricane across the Gulf coast, the Federal Reserve may halt the pace of interest rate hike in the forthcoming open market committee meeting.

Call rates to ease

Call rates are likely to rule extremely easy with huge liquidity inflow compared with the outflow. Calls rate is the cost of funds borrowed by banks for daily lending and borrowing activities. However, if there is a cash-dollar shortage in market, this might put some pressure on the rupee liquidity.

T-bill yields may dip

There are two sets of t-bills to be auctioned this week. While the 91-day t-bill will be auctioned for an enhanced amount of Rs 3,500 crore towards the market stabilisation scheme (MSS), another Rs 500 crore forms part of the borrowing programme. There will be 182-day t-bill worth Rs 500 crore for the government borrowing and Rs 1,000 crore towards MSS.

Brisk trading in the treasury bills and aggressive bidding in the primary auction are expected to push down yields on the t-bills.

Recap: The inflation for the week ended August 20 worked out to 3.08 per cent as against the market expectation of the 3.03 per cent. Reverse repo bids, which imply an excess liquidity, continued to be in the range of Rs 25,000-30,000 crore. The first set of 91-day t-bill auctioned for a notified amount of Rs 3,500 crore under MSS worked out to 5.20 per cent.

CORPORATE BONDS
Govt could float oil bonds

Banks and oil companies are expected to tap the corporate bond market. The market expects the government to issue oil bonds to the oil companies in lieu of the subsidy for not hiking domestic oil prices.

However, the formalities are yet to be worked out. Bank of India may tap the market to raise Rs 1,000 crore through Tier-II bonds.

However, the secondary market trading is restricted to mutual funds which are flush with short-term funds of corporates. Corporates prefer to park funds in short-term schemes to remain liquid and mutual funds, in turn, opt for liquid instruments.

This will help meet the redemption pressure specifically when the foreign exchange market is volatile and the equity market is experiencing a correction.

Commercial papers are increasingly getting replaced by the Mibor-linked one-year non-convertible debentures (NCDs). NCDs have caught the fancy of most of the entities since the short-term rates have been coming down compared with the CP rates which rule in the 5.5-7.5 per cent range.

Recap: There were no major bond issues in the market last week. The spread between the 5-year bond and underlying government securities of comparable maturity continues to rule at 40 basis point.

GOVERNMENT SECURITIES
Caution over oil prices

The government securities market is likely to remain buoyant but for the adverse impact of the oil prices. Barring oil prices, the market can look forward to a number of positive triggers. Foremost, is the expectation in the global markets that the US Federal Reserve may skip rate hike in the next open market committee meeting.

It may take a review of the extent of the damage occurred to the economy as a result of the Katrina. Moreover, the US manufacturing and pay-roll data released last week do not support a robust economic growth story. US yields have been declining with 10-year yield falling to 4.08 per cent from a high of 4.20 per cent a week back.

On the other hand, the yield-based auction to raise Rs 3,000 crore through a 30-year paper and reissue of the 5.69 per cent 2018 paper for Rs 5,000 crore, is the last borrowing programme for the first half of the current fiscal as per the calendar.

Liquidity continues to be a comforting factor. A note of caution has to be maintained as regards to oil prices. To this backdrop, the ten-year paper is likely to rule in the 6.99-7.04 per cent range.

Recap: Government securities remained lacklustre during the first half of the week when a bearish sentiment dominated the market. High oil prices and volatility in the foreign exchange market managed to suppress the trading sentiment. The ten-year 7.38 per cent 2015 paper ruled at 7.09 per cent.

CURRENCY
Re seen in wide band

The spot rupee is likely to rule in a wide range of 43.80-44.20 against the dollar. In line with the cross currency movements, the rupee is set to appreciate. This follows a series of weak data from the US, primarily manufacturing and pay-roll data.

This has already led to an appreciation of the euro and the dollar last week. The equity market is likely to witness some foreign exchange inflows as well.

Dealers feel that if the government increases the oil prices domestically, then the burden on oil companies to borrow excessively from the market may slowdown a bit and thus is the use the domestic liquidity.

Forward premiums

Forward premiums are expected to track the spot rupee this week. This is because the cash-dollar shortage may not continue as the rupee is expected to appreciate following a weakness in the dollar. This might see forward booking of receivables by exporters which will further push down the premiums.

On the other hand, if oil prices rule high, the scenario may differ completely with the market likely to plunge into a cash-dollar shortage. This might even lead to premiums on dollars for near term like one month and two months into discount.

Recap: The spot rupee depreciated to below 44 against the dollar following a sharp rise in oil prices globally. The oil prices rose to $70 per barrel last week.

This led to oil companies, general corporates and banks to cover their open positions which they had maintained by selling dollars anticipating an appreciation of the rupee.

During the end of the week, the rupee gained to close at a high of 43.86/87 against the greenback following the euro's appreciation against the dollar globally.