Good buying demand on anvil

OUTLOOK/MONEY MARKETS

Liquidity will remain abundant this week in the banking system.

Additionally, capital inflows have been given a leg-up by rating agency Moody's, which has upgraded India to investment grade.

Besides foreign exchange inflows, a lack of major outflows except for Rs 500 crore towards 91-day treasury bill auction will mean there is ample cash around.

Net inflows of Rs 2,363 crore scheduled this week will only add to the kitty.

Inflation, which hit a 36-month high of 6.21 per cent last week, has acted a trigger for the gilts market.

Dealers said the headline number will remain lower owing to base effect.

This is because, during the corresponding period last month, inflation was quite high and, therefore base to base the difference will work out to be much less.

With inflation coming down, there is scope for interest rates to come down too, which is set to spur good buying de-mand.

Interestingly, there is a question mark on liquidity in the longer term as bank credit has gone up in the last fortnight by 8.6 per cent "" the single biggest contributor being non food credit, which has grown a terrific 11 per cent.

Easy run ahead for call money
Call money rates are expected to rule lower as there is not much demand for cash.

Although the government has announced a Rs 10,000 states' loan auction and Rs 5,000 crore of scheduled auctions, the impact of this will not be seen in this week.

Players are also expected to prepare for the auction along with the reporting week requirements.

So the impact on liquidity will be only partial.

"There is enough liquidity in the system to take care of these outflows," said a dealer.

Last week, the rates were comfortable and funds could be borrowed for 4.30 per cent.

Repo subscriptions continue to be in the higher ranges, and averaged Rs 25,000-31,000 crore last week.

The intervention activity of the Reserve Bank of India to control the rupee's rise and the lack of outflows from the system only compounded the funds glut.

Dealers said that Mint Road is not in favour of frequent open market operations owing to a lack of government paper.

Treasury bill cut-off to be crucial
There is a 91-day treasury bill auction for Rs 500 crore slated on January 28.

Market participants are of the view that the cut-off rates on these papers will be crucial as they believe that anticipated buying pressure on gilts will drive down the long-term yields and spur the short-term yields to adjust too, to maintain the yield curve.

But if the long-term yield falls without affecting the short-term rates, either the cut-off on the 91-day paper will be lowered to maintain the curve or the cut-off in the longer end will be increased through open market operations or auctions.

Dealers believe that with the outlook on long term interest rates bit blurred for some time and equity market headed for correction , good demand for treasury bills might crop up from the foreign institutional investors and mutual funds.