Healthy liquidity position foreseen

OUTLOOK/Money Market

The abundant liquidity situation will continue this week. Authorities are set to finalise the market stabilisation bond (MSB) plan this week which will replace government securities for open market operations.

Though it is still debated whether this instrument will be launched this fiscal or in the coming year, the MSBs will accompany the structured repo arrangement which will help in daily money market operations.

Besides foreign exchange inflows, lack of major outflows except for Rs 500 crore towards the 91-day treasury bill auction will add to the liquidity situation. The week will also witness Rs 1,925.73 crore of coupon redemptions.

Though the markets had discounted the inflation which touched a 36-month high of 6.21 per cent a few weeks back, a downward revision in the following weeks came as a rude shock last week.

Compared to 5.81 per cent the week before, last week the inflation touched 5.91 per cent. Also, apart from domestic commodity prices, oil prices are seen rigid.

The long-term liquidity situation looks shaky as the bank credit has been consistently going up with the single contributor being the non-food credit sector.

However, reports that the Morgan Stanley Composite Index and FTSE are planning to upgrade Taiwan and South Korea as developed economies as against their present status of emerging market economies may provide solace to dealers.

If that happens, India will be upgraded which will result in more capital inflows into the country as part of emerging markets allocations.

Call rates likely to rule in easy range
Call rates are expected to rule lower this week as there is not much demand for liquidity. Although the government has announced a Rs 5,000 crore scheduled auction, the liquidity situation is enough to avoid any impact in the system.

"Though players will prepare for the auction along with the reporting Friday, the impact on the liquidity will only be minor," said a dealer.

Repo subscriptions continue to flood the market unabated last week with an average daily volume of Rs 37,000-40,000 crore.

Last week additional liquidity was pumped into the system through the intervention of the Reserve Bank of India (RBI) to control the rising spot rupee coupled with lack of outflows.

According to dealers, there was RBI intervention in the spot market to maintain the rupee at the 45.25 levels.

91-day treasury bill yield seen lower
This week will witness the auction of the 91-day treasury bill for Rs 500 crore on February 25. Market participants are of the view that the cut-off rate at the auction will be crucial as last time the cut-off rate was bit higher than the market yield.

However, in order to maintain the yield curve which has risen with the jump in long-term yields, dealers think the RBI will not hike the cut-off yield much at the auction.

They are of the view that with the long-term interest rate outlook unclear for some time and the equity market headed for a correction, good demand for treasury bills may crop up from FIIs and mutual funds.