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| Forex inflows, though firm, is showing signs of slowing down gradually. Further, there has been quite a bit of selling and profit booking by foreign institutional investors (FIIs).
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| Liquidity remains abundant, despite FIIs repatriating their profits, owing to slack credit demand.
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| Further with a recovery in the US and Japan, there could be easing of capital inflows into India in the medium term.
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| In December, FII selling is likely to go up as portfolio investors liquidate positions before the calendar year end to repatriate profits.
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| This week, not many outflows are scheduled except for two treasury bill auctions worth Rs 1,500 crore, whereas inflows of around Rs 4,500 crore are expected via coupon redemptions.
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| Although liquidity as of now is not an issue, the economic and business outlook released by the Crisil Centre for Economic Research has stated that a rise in non-oil imports will feed the uptick in the industrial recovery.
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| This is one of issues which might push credit directly or indirectly and is also one of the factors to keep a watch on for liquidity assessment. Moreover, with a greater push on infrastructure, government spending might go up.
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Surplus funds will temper call rates
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| Inter-bank call rates will hover around 4-4.5 per cent amid surplus liquidity. Subscriptions to the repo bids under the liquidity adjustment facility have come back to their normal level of around Rs 15,000-Rs 17,000 crore.
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| A week before, owing to short-term liquidity mismatches and with no government spending, repo bids had gone down to around Rs 1,800 crore and, subsequently, the RBI rejected all the bids.
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| Market players even resorted to reverse repo for availing liquidity from the RBI which was also rejected, following which the borrowers approached the inter-bank repo market to meet their fund needs.
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T-bill cut-off may be lower
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| There are two auctions slated for this week, Rs 1,000 crore worth 364-day t-bills and Rs 500 crore 91-day t-bills.
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| The t-bills will see market-related cut-offs, which is ruling at lows of 4.40-4.44 per cent against 4.85-90 per cent few weeks back.
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| This time the cut-off is likely to be further lowered a bit going by the cut-off spread announced by the RBI at the auction of the 9-year floating rate bond.
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| Against the expectation of 10-15 basis points, the cut-off was 9 basis points. Similarly, if the yield curve has to be steep in order to factor the term premium, short term could be lowered.
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| The market was rife with expectation of a repo rate cut, which did not happen in the monetary and credit policy.
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| Short-term rates might have multiple methods of signaling, in addition to the repo, after the new draft guidelines for liquidity adjustment facility are released.
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| Market participants are expecting an overhaul of repo mechanism and interest rate signaling methods of the central bank. The guidelines are expected to be released in this week in all possibility. |
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