Inflation fear to mar sentiment

Movement of the dollar globally, inflation and auction results to be crucial; Benchmark 7.38 per cent 2015 gilt is expected to remain in the 7.05-7.20 per cent range; The spot rupee will hover around 43.80-44 against the greenback.

MONEY MARKETS
Liquidity comfort to stay

While indicators like inflation and crude prices have turned bearish, liquidity remains the only comforting factor. According to dealers, even if the government is expected to announce its borrowing programme to raise Rs 8,000 crore, liquidity is perceived to be adequate to manage the outflow.

However, the market is divided over the reverse repo rate hike in the forthcoming credit policy this month-end. While a majority feels that driven by the rise in inflation and crude prices, the Reserve Bank of India (RBI) may opt for a reverse repo rate hike, some are of the view that there might not be a hike as global pressures on economic recovery is gradually slowing down.

On the other hand, with the base effect on inflation coming down and the pass-through effect of the oil price hike getting reflected in the data, inflation has become a cause of concern. Dealers see a few more basis points rise in inflation in the coming weeks.

This week will witness an inflow of Rs 1,972 crore through treasury bill maturity and coupon payments. Outflow may go up to Rs 11,500 crore if the government announces its borrowing programme. Otherwise, through t-bills alone, outflow will be to the tune of Rs 3,500 crore.

A soft week ahead

Call rates are expected to soften given the comfortable liquidity situation. According to dealers, if the auction is not announced, the rates might come down to below 5.5 per cent.

However, if the announcement happens, there might be a temporary tightness in liquidity leading calls to touch the 5.5 per cent mark. Even if the system is flush with liquidity, small banks often face problems intra-day, dealers said.

Reverse repo bids will be robust this week as well with liquidity being surplus, mainly driven by the government's expenditure.

Cut-off yields may dip

There will be two sets of treasury bill auctions - 91-day t-bill for Rs 2,000 crore and 182-day t-bill for Rs 1,500 crore. The cut-off yields, especially for the 91-day t- bill, are likely to soften a bit.

This is because this week market operations may not get disrupted unlike in the last week. Last week, banks had to arrange money to maintain liquidity for five days consecutively owing to the strike. This had increased the pressure on liquidity and consequently on t-bill cut-off yields.

In order to avoid volatility and uncertainty in the outlook on interest rates, most of the players will continue to confine to trading in treasury bills.

Recap: Inflation for the week ended September 17 rose to 3.75 per cent from 3.53 per cent a week ago. Pass-through effect of the oil price hike had resulted in the inflation rise.

CORPORATE BONDS
REC, PFC float this week

After a long series of tier-II corporate bond issues from banks to boost their capital adequacy before the end of the second quarter, the market is likely to witness two big-ticket floats from the Rural Electrification Corporation (REC) and Power Finance Corporation (PFC).

However, the trading in the secondary market of corporate bonds has turned lacklustre as investors had lapped up the primary issues and are holding on to them to cash in on the yield differential.

Commercial papers continue to be buoyant along with Mibor-linked non-convertible debentures (NCDs). This is because most of the corporate borrowing for the 90-day period will come for roll-over without companies required to hike their exposure.

NCDs offer the flexibility of floating interest rates to the issuer and the investor. With the outlook on long-term interest rates uncertain, most of the corporates are preferring for short-term borrowing.

Recap: The spread between five-year triple-A bonds and the corresponding government security continues to remain at 40 basis points.

As on September 15, 1,392 commercial papers were issued at an interest rate ranging from 5.50 to 6.56 per cent as against the 5.45-7.50 per cent range.

GOVERNMENT SECURITIES
Bearish trend ahead

The government securities market is expected to be bearish. This is because the base effect on inflation has not only come to an end but also since the pass-through effect of the oil price hike has flared up the rate, said dealers.

As part of the government's borrowing programme, an auction has been scheduled this week to raise Rs 8,000 crore. The uncertainty regarding global oil prices is expected to continue.

To top it all, the market is expecting a reverse repo rate hike in the forthcoming credit policy this month. Moreover, with the close of the September quarter, the incentive for buying securities is also not there. Thus the market is also lacking trading interest, said a dealer.

Recap: The yield on the benchmark paper ended the week at 7.12 per cent amidst lacklustre trading as most of the days in the week became holidays following the strike. Government securities prices fell as sentiment turned bearish with a rise in inflation and expectation of a reverse repo rate hike in the forthcoming credit policy.

CURRENCY
FII inflows to prop up rupee

The spot rupee is expected to rule in the 43.70-43.44 against the dollar. The market expects the dollar to weaken tracking a strong euro globally. The US economic data are also not supporting the recovery story and are further pressuring the dollar.

Nearer home, an upward rally in the equity market is likely to keep foreign institutional inflows going, which, inturn, may push the local currency up.

The demand for dollars by oil companies seems to be subsiding as oil price is slowly coming down. If this continues, the market may see exporters and custodian banks selling dollars which will be positive for the rupee. The only negative news that could mar the good mood is the uncertain oil prices.

Forward premiums are expected to track the spot rupee and soften. More so, the demand for dollar is likely to ease with the close of the month. The forwards may further ease with exporters selling dollars if the spot rupee appreciates.

However, if the oil prices play spoilsport, the scenario may reverse. However, dealers feel that market may not see a shortage in the cash-dollar position and a reverse movement of the forward premiums into discount.

Recap: The spot rupee and forward premiums remained ranged during the week with most of the working days staying dull owing to the bank strike.

However, tracking the euro's strength, the rupee moved with an appreciating bias even as foreign institutional inflows were waning.