Inflation holds key, Re ranged

Gilt auction and Asian currency movement versus the greenback are crucial for the market; The spot rupee is likely to rule in the range of 45.75-46 against the dollar; The 10-year gilt is expected to trade in a wide range of 7.75-7.90 per cent.

LIQUIDIYT
Oil hike fallout looms

The fact that liquidity was abundant in the system was underscored by the Reserve Bank of India, which last week increased the size of the government securities stock to be sold through auction, feel dealers.

What, however, worries the market is the effect of the oil price hike on inflation rate. Inflation is likely to firm up in the coming weeks after incorporating the pass-through effect of domestic oil prices. In fact, it is likely to hover in the range of 5.2-5.4 per cent.

The rebound of Asian currencies against other major currencies has, however, been a sign of optimism. Crude oil prices below $70 a barrel and US 10-year treasury yields falling below 5.10 per cent to 5.07 per cent could add bullishness to the market.

While the US Fed rate hike is already factored in market yields, chances of another increase in reverse repo rate is debatable, feel market players. This is because even if the market is quite confident of another quarter per cent increase in the Fed rate, it will be more watchful of the statements that could emerge out of the Fed open market committee meeting. This is because the economic data coming out of the US has not been supporting a strong economy, said a dealer.

Therefore the RBI may not push the panic button yet again, market feels. This week, the system will witness an inflow of Rs 4,752 crore against an outflow of Rs 13,000 crore.

CALL MONEY
Upward bias seen

Call rates will be comfortable but with an upward bias following the outflow of around Rs 13,000 crore towards the middle of next week. Already around Rs 10,000 has flown out of the market towards advance tax which is yet to come back into the system.

Added to this, will be the pressure on banks to set aside funds for maintaining the fortnightly reserve requirements.

TREASURY BILLS
Auction cut-off crucial

The government will auction two treasury bills, 91-day and 364-day, as part of the government borrowing programme and market stabilisation scheme to mop up excess liquidity.

Under the 364-day t-bill, Rs 1000 crore each gets absorbed towards government borrowing and MSS. Similarly, in 91 day t-bill, Rs 1,500 crore gets absorbed under MSS and another Rs 500 crore towards government borrowing.

The cut-off yield at the auction will be crucial going by the treasury bill auction last week, that witnessed the sharpest hike in the yield. Recap: The headline inflation came up to 4.72 per cent for the week ended June 3 against 4.68 per cent for the week ended May 27 owing to rise in prices of food and manufactured products.

GOVERNMENT SECURITIES
Auction size to dent sentiment

The market sentiment will remain bearish owing to the RBI's decision to increase the issue size of the securities to be auctioned by preponing the calendar.

The Reserve Bank of India on June 22 will auction 7.37 per cent government stock 2014 and 7.94 per cent government stock 2021 for Rs 5,000 crore and Rs 4,000 crore. The auction was originally slated for a notified amount of Rs 5,000 crore.

Even if the current market yield for the 8-year paper is 7.54/55 per cent, the auction is likely to fetch yield of 7.65 per cent.

In the 15-year segment, the yield may firm up even higher than the market yield of 8.20 per cent to 8.25/30 per cent as it is a long-term paper with limited trading interest.

The market was, in fact, expecting an upturn in sentiment following a moderation in international indicators. Crude has been hovering below $70 a barrel, US treasury bonds have experienced a slide in their respective yields and rupee has appreciated following a rebound in Asian currencies.

Thus in this backdrop, the yield on the 10-year paper 7.59 per cent 2016 is expected to rule in the range of 7.85-7.90 per cent.

Recap: Trading was lacklustre during the week on apprehensions of auction announcement. Traders were cautious on liquidity as advance tax outflows stood at Rs 10,000 crore and also the impact of the oil price hike on inflation.

CORPORATE BONDS
No major floats on cards

There are no major primary issues in the long and medium term. Banks and corporates are raising money through short-term instruments such as certificate of deposits (CDs) and commercial papers. Following the 25 basis point reverse repo rate hike effected by the Reserve Bank of India and a sharp rise in cut-off yield of the 91-day and 182 day t-bill at the auction held last week, short term rates are likely to go up fast.

Secondary market trading in corporate has come to a virtual halt as there is no interest from banks . Besides the losses booked in the corporate bond portfolio last year, banks have turned cautious as far as entire investments and trading is concerned.

Prior to the reverse repo rate hike, brisk trading in CDs had brought down the rates from a high of 8.45/8.7 per cent to 7.90 per cent.

However, short-term lending rates by banks to corporates has moved up sharply from 7.95-8 per cent to 9.25 per cent, said dealers.

Recap: The spread between the 5-year AAA corporate bond and government security has widened to 95 basis points owing to lacklustre trading. For the fortnight ended May 31, number of CPs issued have gone up from 2068 to 2633 with a total of 3285 CDs floated in the market by May 12.

RUPEE
Global factors to perk up rupee

Globally the dollar is likely to stabilise as most of the key US economic data are out, ahead of the June 29 meeting of the Fed. Asian equity markets, on the other hand, are gradually expected to hold ground after a major correction. Crude oil prices are likely to rule below $70 a barrel.

These factors are expected to perk up inflows into the Indian equity market which will provide a support to the dollar rupee exchange rate as well. On the other hand, the spot rupee is likely to be supported by the RBI through intervention at 46 to a dollar, said dealers.

The premium on forward dollars is likely to firm up owing to rising cost of rupee funds. The yields on government securities are likely to inch up further following a bearish sentiment in the market. This may add to the strain on the premium.

If the spot rupee appreciates, exporters may sell near term dollars to avoid losses, thus easing pressure on forward premiums. In this backdrop, the spot rupee is expected to rule in the range of 45.75- 46 to a dollar.

Recap: The spot rupee gained on the back of an appreciation of all other Asian currencies. As against an opening of 45.93/95, the rupee ended the week at 45.84 . Forward premium, however, shot up during the end of the week with rising cost of funds following the reverse repo rate hike.