IMD redemptions weigh heavy

Call rates likely to hover in the 6.00-6.50 per cent range on account of IMD outflows; The yield on the 8.07 per cent 2017 government paper will hover in the 7.17-7.21 per cent range; The rupee is expected to trade in the 45.00-45.20 per dollar range; Rs 33,000 crore IMD redemption outflows to weigh this week.

LIQUIDITY
EPF, MSS move to provide relief

The outgo of $7.3 billion or Rs 33,000 crore on account of redemption of the State Bank of India's (SBI) India Millennium Deposits on December 29 is expected to put a strain on liquidity. The existing situation is already tight due to slack government spending and outflows of an estimated Rs 20,000 crore due to advance tax payments.

The debt market dealers feel the market is likely to move in a rangebound manner as liquidity pressure could overweigh the marginal fall in inflation.

The Reserve Bank of India has said the SBI will pay the central bank nearly Rs 33,000 crore for buying the foreign currency needed to redeem IMDs. SBI will use about Rs 22,000 crore of treasury bills maturing around the same time to redeem IMDs.

SBI will receive Rs 11,000 crore from several banks, particularly foreign banks, which had taken loans from the country's largest bank against IMDs sold in November 2000. Cash surpluses have dwindled due to last week's tax payments and traders expect a bulk of this will come back to the banking system in the next few days by way of government spending.

Traders are hopeful that interest payments of Rs 10,000 crore expected by December end on a special deposit scheme run for investment by India's largest pension fund, the Employees' Provident Fund, would give a boost to fund supply.

In a bid to provide as much comfort as possible, the central bank has called off the MSS auctions scheduled for December 28. It has announced the auction of 91-day and 182-day treasury bills, both for a notified amount of Rs 500 crore, under the regular auction calendar.

Taking into account all the relevant factors, the RBI has decided that the auction of 91-day t-bills for Rs 1,500 crore and 182-day t-bills for Rs 1,000 crore, scheduled for December 28, under quarterly indicative schedule for MSS will not be conducted.

This implies a release of Rs 1,552 crore from the MSS account since the 91-day t-bills issued earlier under MSS on September 28 would redeem on December 30.

This also implies a release of Rs 1,000 crore from the MSS account since the 182-day t-bills issued earlier under MSS on June 29 would redeem on December 31. Inflows into the Indian money market in December from interest payments and redemptions of government securities and treasury bills are estimated at Rs 30,480 crore.

CALL RATES
Rise on cards

On account of the IMD redemptions, money market traders said that SBI could tap the domestic market and this could lead to dearer cash.

In any case, cash surpluses with banks have fallen in December following outflows of an estimated Rs 20,000 crore as advance tax in the first two weeks, pushing up the overnight funds rate by about 75 basis points to more than 6 per cent. Call rates are likely to hover in the 6-6.50 per cent levels and could scale greater heights, depending on the demand for funds, say dealers.

INFLATION
May dip further

Money market players anticipate a further dip in inflation. Yet, they feel that the pressure on liquidity will outweigh the marginal gains from the fall in inflation.

Recap: The domestic wholesale price index rose 4.50 per cent on an annual basis in the week ended December 10, down from previous week's 4.55 per cent, mainly due to a fall in food prices.

CORPORATE BONDS
Spread to remain flat

The current spread on a five year AAA-rated corporate bond stands at 79.06 basis points and is likely to remain flat this week. Volumes, however, will continue to be marginal in the corporate bond market, say traders. Private sector ICICI Bank plans to raise more than Rs 250 crore through bonds to shore up its tier-II capital.

GOVERNMENT SECURITIES
Uncertainty rules

Liquidity, global oil prices and US yields would determine the yield range for government securities. However, dealers expect gilts to have a bullish undertone on account of benign outlook on oil and yields on US treasury notes.

The yield on the nine-year government stock will hover in 6.95-7.00 per cent range. The yield on the 8.07 per cent 2017 government paper will hover in the 7.17-7.21 per cent range.

"The market looks subdued till the year end with shallow volumes as traders are cautious of taking any fresh position. With IMD redemptions coming up, investors are uncertain on the liquidity condition next week," said a treasury dealer. Further, the government is scheduled to borrow in the first week of January, which will determine the market sentiment.

Liquidity is likely to come under pressure on account of redemption of IMD. Some dealers are of the opinion that IMD outflows will not exert much pressure on domestic liquidity as both RBI and State Bank of India are well equipped to tackle the situation.

CURRENCY MARKETS
Awaiting cue from the yen

The rupee is expected to trade in a wide range of 45.00-45.20 per dollar. The Indian currency is expected to show a two-way movement taking cues from the Yen's rally versus the dollar and FII inflows. "If there wouldn't be much oil-related buying (of dollars), the rupee is likely to touch the 45-mark once again this week."

Said a chief dealer, "The dollar looks very volatile in the overseas market, which is highly unusual in December. If the Japanese Yen continues to rally compared with the dollar, then the rupee will gain support at existing levels. On the other hand, if yen slides this week, then it will weigh on the rupee."

Further, the forex market will witness low volumes as the global markets will be closed on Monday and Tuesday on account of Christmas. "Any small demand for dollar in the domestic forex market will lead to high volatility," said another dealer.

Another determinant would be inflow from foreign investment. "Some big foreign capital inflows have been coming, which have supported the rupee," a chief dealer at a foreign bank said.

Foreign funds invested $1.8 billion in the buoyant equity market, helping the rupee gain 1.7 per cent this month. Total stock purchases are now at a record $10.4 billion in 2005, nearly $2 billion more than in 2004. Dealers say, the demand for the greenback in the local forex market is likely to decline in coming weeks.