Festive strain likely on liquidity

Foreign exchange inflows, liquidity and inflation will be crucial for the market; The spot rupee is expected to rule in a wide range of 45.20-70 to a dollar; The benchmark ten-year papers are expected to hover in the range of 7.62-7.70 per cent.

LIQUIDITY
To stay tight in the run-up to festival

Liquidity condition is likely to remain tight in the weeks ahead leading to the festive season. Bankers feel that currency in hand in the form of cash is expected to go up during Diwali, which might put some pressure on banks to set aside funds for meeting the demand.

Moreover, there are holidays lined up starting from this week. Therefore, banks will have to keep funds for interbrain settlement and other requirements.

On the other hand, liquidity is also expected to improve with foreign exchange inflows into the country as major institutional investors are keeping a track of the booming equity market here. Inflows are particularly likely to improve in the coming days with the market all set to witness some big-ticket public offerings.

With the GDP clocking a growth of 8.9 per cent, the country's economy is also expected to witness heavy portfolio investments, says a custodian banker. This will be irrespective of the performance of other Asian markets, he adds.

Meanwhile, dollar is bullish and is poised to gain against other major currencies However, dealers feel that appreciation of the US currency has already reached a point of small correction.

If the rupee appreciates, this may push exporters to sell their proceeds to realise the rupee receivable. So, liquidity may not be a problem in the near term.

Going forward, resource mobilisation for banks to fund the long-term assets exposure taken in the form of term loans may be an issue. This is because the demand for funds by the banks will compete with the central and state governments' borrowings.

Liquidity will, therefore, be seen as a crucial factor in the coming weeks as well "" albeit oil has ceased to be a concern as the prices have already breached the critical barrier of below $60 a barrel. However, the inflation concern continues to hound with prices of commodities persisting on the upside.

This week will witness an inflow of around Rs 3,108 crore against an outflow of Rs 3,700 crore, which includes auction of treasury bills and state government borrowings of Rs 200 crore.

MONEY MARKETS
Tightness will be a temporary blip

Following the demand for liquidity, the interbrain call rate is expected to remain firm in the range of 6.70-6.80 per cent. The tightness will be a temporary blip since in the subsequent weeks after the festive season, liquidity conditions will be aided by the central government expenditure and foreign exchange inflows.

TREASURY BILLS

The market will witness auction of 91-day and 182-day treasury bills for Rs 2,000 crore and Rs 1,500 crore, respectively.

Since the liquidity conditions will remain firm, the RBI may raise the cut-off yield to reflect the temporary tightness in liquidity in the market.

The secondary market is likely to witness demand from banks and mutual funds, but the earlier flavour for the short-term papers may not linger.

This is because banks are shifting the portfolio to long-term papers with an increase in the long-term deposits. So, the scope for a fall in interest rates is seen much more in the long term than in the short term of the yield curve.

GOVERNMENT SECURITIES
Trading will be cautious

The market will trade in a cautious mode. This is because liquidity is expected to remain tight owing to a string of holidays in the weeks ahead following the festive season. Banks will not only set aside liquidity for their own interbank requirements but also to meet the customer demand.

The Diwali season usually sees a spurt in cash holding by the retail customer, which might lead to a sharp rise in currency in circulation, a dealer said. So, there will be additional pressure on the liquidity, which is already under strain since the advance tax flow last month.

Inflation is likely to be watched seriously. According to dealers, the inflation figure in the coming weeks will be crucial for the central bank to take a call in its review of the interest rate in the forthcoming policy review during the end of this month.

However, to this effect, oil prices have proved to be a boon in the recent week since it has climbed down from a high of $76/77 to a low of below $60 a barrel.

Globally, US yields may not be of much help to the market this week. This is because as the data on retail sales and input prices has been bullish on the dollar, US yields may firm up a bit from their current levels.

Most of the banks will be seen booking profit and squaring off positions to meet the liquidity demand. In the domestic market, banks' rush to buy government securities to meet the SLR demand for backing up the growing balance sheet may take a pause for the time being, the dealer said.

Against this backdrop, the yield on the ten-year benchmark is expected to rule in the range of 7.60-70 per cent.

CORPORATE BONDS
Banks plan raising of funds

Yes Bank, a new-generation private sector bank, is in the process of raising funds through its maiden issue of tier-II bonds. Other banks expected to tap the market are Dena Bank, Vijaya Bank, Punjab National Bank, Bank of Maharashtra, and UCO Bank.

Some of the public sector undertakings, which are likely to visit the bond market for resource mobilisation, are Power Grid Corporation, Power Finance Corporation and Rural Electrification Corporation, said a bond dealer.

The primary corporate bond is also awaiting the oil bonds, which are to be issued by the government to the oil companies for subsiding the losses incurred by them last year due to rising global crude prices The provident funds, especially are looking forward to these bonds sine these have been made legally eligible for being invested by the PFs unlike earlier.

While the primary market is abuzz with issuances, the secondary market is quite lacklustre. Major corporate houses like Reliance Industries, Tata Sons, Grasim and Hindalo, which used to be frequent issuers of bonds in the market earlier, have now bought back their bonds or have stopped reissuing them after maturity.

This is because most of them have cash surplus. So, the need is limited or it is met through the foreign currency borrowings route. There is less appetite for perpetual bonds issued by the market.

Dealers said most of these bonds have been bilaterally placed with banks with embedded swaps. Most of the banks, in turn, are either offloading to the less savvy investors such as provident funds or are holding them in their books.

Employees Provident Fund, which used to be one of the major buyers earlier, is staying away from these bonds owing to their non-transparent pricing, sources said.

CURRENCY
Spot rupee will rule higher

On the back of a buoyant domestic equity market, the foreign exchange market is expected to invite higher forex inflows. This is expected to make the spot rupee rule with a bias towards appreciation.

Even as the US retail sales and input prices data have been bullish on the dollar, the market is of the view that the dollar has been on an appreciation curve for quite some time to warrant a correction.

When the spot rupee appreciates backed by inflows, it is quite likely that exporters will sell their dollar receivables for fear of losing lucrative levels at least for the near term. Another factor that might push the spot rupee up is the non-deliverable forward market.

In this derivative market operating in the south-east Asia, the rupee is trading at a premium, a dealer said. With the underlying of the spot rupee-dollar exchange rate, there is demand to book rupees in the domestic market and sell it in NDF.

Since the market is bracing up for a string of holidays during the festive season, custodian banks may be seen selling dollars frantically to enter the equity market. The custodians are mostly the foreign banks, which operate on behalf of their clients "" foreign institutional investors.

The forward premia on the other hand will continue to rule firm. This is because the market has factored in a hawkish stance by the banking regulator in its forthcoming monetary policy review.

Moreover, since the rupee is testing new levels of appreciation, oil companies, for their near-term demand, may rush to the market to book dollars. At the same time, the market is also likely to witness a wait and watch policy adopted by importers for their long-term dollar requirements.

This is because as the spot rupee has already breached 45.50 levels last week to move to a four-month high of 45.43/44 to the dollar, a further appreciation is also likely, a dealer said. Given the inflows, the spot rupee is expected to even reach an upside of 45.10.

However, if the dollar strength continues globally, along with the consistent dollar demand by oil companies, and foreign exchange inflows fail to match up with the demand, it may even reach lows of 45.70 to a dollar.

Recap: The spot rupee was in an appreciation mode driven by foreign exchange inflows. While foreign banks were seen selling dollars on behalf of their custodian clients, corporate also realised their dollar receivable in the Indian currency.

Even as the spot rupee appreciated, the premia to be paid in the rupee to book forward dollars remained firm owing to consistent dollar demand from oil companies and general importers.

With inflation ruling high, the market also factored in for a rate hike in the forthcoming RBI mid-term policy review.