Inflation cloud looms; Re ranged

Liquidity FII outflow may put pressure.

Liquidity will remain comfortable during the week. Albeit, there are factors which calls for efficient fund management by the banks. The system will witness an outflow of around Rs 18,000-20,000 crore towards total advance tax outflows from various businesses across sector by December 15.

Therefore, banks will remain cautious for providing funds for paying the taxes. In addition to this, there will be an outflow of around Rs 9,000 crore from the system towards government borrowing.

If foreign institutional investors decide to book profits and repatriate funds as is the conventional norm during the year-end, it might create further pressure on liquidity.

Similarly, foreign exchange inflows, however, may take a backseat for the time being since the global markets are heading from portfolio reshuffle from riskier assets to local fixed income markets, going forward to the end of the financial year.

On the supply front, there will be an inflow of around Rs 453 core this week. As evident from the figures released by the Reserve Bank of India in its weekly statistical supplement, the government has been spending . This is because the deposits with the RBI over the week from November 17 to November 24 has slipped from RS 18,213 crore to 11,405 crore .

This is expected to continue, said a market dealer. Therefore, this week might not witness any major crunch on liquidity. However, the situation will be crucial after the advance tax outflows next week, he added.

Call money Rates to stay ranged

Money market rates or very short term rates of 2-15 days maturity, otherwise referred to as interbank call rate and term money rate, are likely to remain benign this week.

However, if banks start preparing for advance tax outflows and government security auction this week, the rates might come under pressure.

On the other hand, if liquidity comes under too much strain, RBI may intervene with buying dollars and infuse equivalent rupees into the market.

Treasury bills Cutoffs will be firm

The market will witness auction of 91- and 364-day treasury bills for Rs 2,000 crore each.

The cutoff yields are likely to remain firm since short-term liquidity is perceived to be tight following advance tax outflows. Moreover, concerns on high inflation has led to lurking fear of another increase in interest rates . These perceptions might get factored into the cut-off yield, said a market dealer.

Recap: The cut-off yield on 91 day t-bill rose by 4 basis points to 6.68 per cent, while the yield on the 182-day t-bill came down by 4 basis points to 6.88 per cent last week.

Inflation rate for the week ended November 18 shot up to 5.45 per cent against 5.29 per cent for November 11. The rise is primarily owing to an increase in prices of minerals and manufactured goods.

Government securities Inflation to cast cloud

The sentiment in the market may remain bearish following the concern on the inflation rate. The inflation continues to remain much on the higher side and now oil prices have also started firming up, hovering around $64 a barrel.

This has led the market to feel that the RBI may take certain monetary measures to control inflation, possibly a interest rate hike.

The rising interest rate scenario is likely to trigger a round of downward correction in prices of government securities, thus, pushing up yields. The RBI will auction two government papers - 7.37 per cent 2014 and 8.33 per cent 2036 to raise around Rs 9000 crore on December 8. Therefore, to participate in the auction, the banks would pare some exposure as well, said dealers.

Since the yields are likely to firm up, banks will cut down positions to pick up same papers at lower prices and realign yields with current levels.

In this backdrop, the yield on the 10-year benchmark is hovering in the range of 7.43-7.47 per cent.

Recap: The government securities market rallied in the beginning of the week, primarily tracking yields of US treasury bonds. There was brisk trading in the10-year segment, especially in the auctioned paper last week, which will soon emerge as the 10-year benchmark, replacing the 7.59 per cent 2017.

During the end of the week, trading was cautious as traders cut positions for fear of correction triggered by concerns on inflation.

Corporate Bonds Banks to tap mart

Once again , with advance tax payments and end of the third quarter of the financial year around the corner, a number of banks will be seen tapping the market for raising funds.

These include upper tier II, lower tier II and perpetual bonds from Dena bank, Vijaya Bank, Indian Bank, and Syndicate Bank.

Growing demand for housing and infrastructure-related loans and restriction on other avenues for raising finance have forced housing companies and infrastructure companies also to hit the bond market. This includes Infrastructure Leasing and Finance Services, Housing Development finance corporation and PNB Housing finance.

These housing companies are, on an average are raising 5-year funds at 8.75-8.85 per cent and 10-year funds at 9.15-9.25 per cent.

Quite a few new issues debuted last week and also are likely to feature in the market this week as well for secondary market trading . Some of these included Indian Railway Finance corporation, Power Finance corporation and Food bonds from the Food Corporation of India.

IDBI bank is also in the process of raising Rs 350 crore through lower tier II bonds by offering 8.85 per cent for 10- years.

Despite the supply and pick-up in credit demand, not many banks are interested in investing bonds and help corporates mobilise funds. This is because for every investment in corporate bonds, the banks will have to value it on a daily basis vis-à-vis the market value .

If it results in a loss, the banks will have set aside funds as part of provisioning for the losses.

Recap: The spread of AAA corporate bonds with corresponding government securities of 10-year maturity continued to rule high at 125 basis points. Trading interest was seen from banks and provident funds of the banks.

While the PFs hold the securities to maturity, the banks earn a yield differential by selling these. The banks raised around Rs 1,282 crore through certificate of deposits for the fortnight ended October 27 and corporate mobilised around Rs 259 crore for the fortnight ended November 15 through commercial paper.

Rupee Scope for upside limited

Scope of appreciation of the spot rupee will remain limited and in all likelihood, the upside seems capped around 44.60, said a market dealer. There are a combination of factors which may affect the rupee. Cross-currencies "" euro, yen and pound "" all have been gaining against the dollar since last week .

While most market players feel the appreciation will continue and it will help to prop up the rupee as well, some harbour a different view. Since dollar had depreciated for quite sometime, it is poised for a small correction.

Besides, as seen from the trend in the previous years, most fund managers globally might withdraw assets from riskier assets and park in the safe haven of fixed income securities including US treasury bonds. This might help in appreciation as well. Globally, this may lead to a depreciation in cross currencies including rupee against dollar.

This time, domestic factors weigh over global factors. Following rising crude prices, the market is likely to witness domestic demand from corporates, including oil companies.

Supply, on the other hand, may also improve if the RBI decides to intervene by buying dollars from the market to infuse equivalent rupee to cope with the tight liquidity situation.

Year-end reshuffling of FII portfolios may also see some correction in the Indian equity market and repatriation of funds from India.

Forward premiums, on the other hand, will continue to remain firm since the market perceives an imminent rise in interest rates in the short term of next one or two months. This follows concerns raised by the finance minister on the rate of inflation after the government announced the GDP data.

The market perceives that the inflation may shoot up to beyond 6 per cent by the end of the financial year, but much of it could be attributed to base effect as well. However , given the GDP growth and concerns on inflation, the RBI is expected to react with a reverse repo rate hike, said a market dealer.

In this backdrop, the spot rupee is expected to rule in the range of 44.60-44.75 to a dollar.

Recap: The spot rupee remained rangebound with demand and supply almost matching on a intraday basis.

In the beginning of the week, even with heavy supply of foreign exchange, courtesy the equity market , appreciation of the spot rupee was reined in with dollar demand from the corporate to meet the month end requirements .

Rising crude prices also forced oil companies to be proactive stocking up dollars for future payments.

Inflows into the Indian market got bolstered following the ADR/ GDR and ECB proceeds of the corporate besides foreign exchange from pure foreign institutional investors.

Forward premium, on the other hand, continued to remain firm owing to concerns on the rupee liquidity and fears of upwards revision in the interest rates.