Inflation, crude prices remain key concerns

OUTLOOK

LIQUIDITY
External factors hold key
The banking system will have enough liquidity this week. The government continues to spend after a decline in inflationary pressure.

The government has Rs 25,000 crore of surplus with the Reserve Bank of India (RBI). The outstanding amount under reverse repo auctions stood at Rs 18,895 crore at the end of last week.

Inflation remains moderate. For the week ended July 16, inflation moved up a bit to 4.18 per cent from 4.14 per cent in the previous week. Global crude prices will be keenly watched for its implication on inflation.

Any sign of a sharp rise in inflation could again lead to government cutting down on spending. The RBI has decided against raising interest rates despite global uncertainties and has promised to respond to evolving circumstances.

TREASURY BILLS
Stable cut-offs seen
Treasury bill auctions this week, including under the market stabilisation scheme (MSS), will suck out Rs 500 crore more than in the previous week.

T-bill auctions aggregating Rs 4,000 crore will be held on August 3. The 91-day t-bill auction will have Rs 500 crore component from the regular auction calendar and Rs 1,500 crore under MSS.

The 364-day t-bill auction will have two components of Rs 1,000 crore each "" one under the regular auction calendar and the other under MSS.

The cut-off rates are expected to be closer to the previous week levels as RBI has opted for status quo on interest rate front in its quarterly review of the monetary policy.

CALL RATES
Rates may ease further
Call money rates, the rate at which banks lend and borrow in the inter-bank money market, are expected to ease further. Call rates stabilised last week after two weeks of volatility (hitting a high of 6 per cent on tight liquidity).

It ended the previous week sharply lower at 1 per cent amid scramble among banks to park surplus funds in a market with few borrowers.

Most of the deals during the week, including on Saturday, were struck at around 5 per cent. Easy liquidity conditions coupled with two days of holidays led to a supply glut.

CORPORATE BONDS
Trading interest to rise
No corporate bond issue in the primary bond market is slated for this week. Trading interest in corporate bonds will be higher on the back of increased activity in the government securities market.

The corporate bond market will gain from the absence of government securities auction this week.

The RBI quarterly review has also ended uncertainties on the interest rate front. The demand for corporate bonds will continue from insurance companies and mutual funds.

Recap: The corporate bond market will continue to follow the government securities market.

The yield on a triple-A rated five-year paper dropped to 7.02 per cent from 7.11 in the previous week, in line with the movement in yield on government securities.

GILTS
Prices in a groove
Government securities prices will move in a narrow range having undergone a sharp correction on the Reserve Bank of India's decision to keep interest rates unchanged.

The benchmark 10-year paper is expected to trade in 6.95-7.05 per cent range. Inflationary expectations continue with the global oil prices touching the $61 per barrel mark.

Recap: Bond market was euphoric after the apex bank left interest rates unchanged. The yield on 10-year, 7.38 per cent 2015 paper rose to 6.95 per cent from 7.16 per cent as banks unwound positions built ahead of the quarterly review expecting an increase in rates.

The yield on the benchmark paper closed at 6.99 per cent on Saturday.

The week was shortened by two days of holiday on Wednesday and Thursday as heavy rains lashed Mumbai on Tuesday.

RUPEE
No mismatch in demand-supply
The spot rupee is expected to be rangebound with supplies matching demand for the dollar.

The demand for dollars for oil imports will keep the rupee under pressure, but FII inflows and dollar selling by exporters at every depreciation of the rupee will act as stabilisers. The rupee is expected to move in a range of Rs 43.45-55 per dollar.

The rupee has appreciated by around 0.6 per cent against the dollar at the end of July from early April levels. India's foreign exchange reserves have declined to $137.53 billion from $141.5 billion at the end of March.

FORWARDS
Premiums seen range-bound
Premiums on forward dollars are also expected to be rangebound as the rupee is unlikely to be allowed to appreciate or depreciate beyond a certain level.

The premium on six-month forward dollar on last Friday was 1.05 per cent, up from 0.95 per cent on July 22.