Call money rates are likely be in the range of 6.50 per cent to 7 per cent during this week as the liquidity condition in the banking system will remain comfortable and the demand for funds thin.
However, if the India-Pakistan standoff escalates the rates can even cross the 8 per cent level. Said a primary dealer: "There is ample liquidity at present, and the week being the second of the reporting fortnight, demand for overnight money will also be low. This should keep the rates below the 7 per cent level."
Call money rates stayed in the range of 6.60 per cent to 7.15 per cent on Saturday as the demand was not high.
A dealer with a private sector bank said most of the banks have covered their cash reserve ratio position by Thursday and hence there were not much requirement for funds.
Dealers said the situation will remain unchanged for most part of the week as well.
There is no possibility of a government security auction during the week either, which can suck out some funds.
A dealer with a foreign bank said: "The ways and means advances to the Centre stood at Rs 6,720 crore as on December 28. This amount is well below the upper limit of Rs 10,000 crore. Therefore, an auction of government paper seems unlikely."
A dealer said he advance tax outflows, which have started coming back into the banking system since last week, will flow in in a bigger way this week. This will keep the system more fluid, pushing down the call rates.
The treasury head of a private sector bank said deposit growth has slowed down and there is not much inflow through foreign exchange. "However, as the tax outflows have started coming back into the system, there is still a liquidity overhang. We hope it will continue even during this week," he said.
Meanwhile, government security prices are likely to go up only marginally this week despite the easy liquidity levels in the market. Participants are likely to take a cautious approach as the prices are already close to their highest-ever levels.
Said a primary dealer: "Even though liquidity in the market is good, there is very little chance of any significant rise in prices as they have already increased too much over the last one week."
A dealer with a new private sector bank said: "The banks have to now think of other avenues for deploying their money. A very high price (implying a very low yield) is always a risk as, in case the prices crash, it would lead to huge losses."
However, dealers said there may be a significant rise in prices (dip in yields) of illiquid papers during the week. The yield differential between the liquid and the illiquid papers has become unsustainably high and, hence, there is a chance of a realignment. Dealers are expecting that this will through the rise in price of the illiquid variety, while prices of liquid papers will remain around their current levels.
Market participants, however, will continue to keep an eye on the border situation and any deterioration in that may result in prices crashing across all maturities.
