Liquidity crunch to continue

Liquidity is likely to remain under stress for major part of this week, say bond market players. There is also no direct indication regarding the extent to which the market might see easing of the liquidity situation.

Overall, the dealers feel that it would be a very cumbersome week as a few market participants are expected to exit from their current positions.

The Reserve Bank of India (RBI) has announced the auction of 91-day and 364-day treasury bills for a notified amount of Rs 500 crore and Rs 1,000 crore, respectively, under the regular auction calendar. The bank injected an average of Rs 20,450 crore daily through the repo auctions.

CALL RATES
Seen at higher levels

Traders expect the inter-bank call rates to hover in the 6.50-7.50 per cent range. With the liquidity expected to remain strained, call rates are seen at high levels.

The rates have been trading above 7 per cent for more than three weeks now. "Overnight rates will continue to be at existing levels for another three to four days," a bond market dealer said.

Recap: Last week, call rates closed at 7.10 per cent on Monday and ended the week at 7.25 per cent. They had shot up to 8.15 per cent on Friday, which prompted banks to take advantage of the arbitrage offered by lower rates in the collateralised borrowing and lending obligation (CBLO) market.

INFLATION
To head north

In the weekly inflation data released on Friday, the domestic wholesale price index rose to 4.40 per cent on an annual basis in the week ended January 14, higher than the previous week's level of 4.24 per cent.

According to the data, this was due to an increase in the prices of manufactured products. Headline inflation does not reflect the underlying inflation pressures, say analysts.

Going forward, it is expected that demand pressures could manifest in higher headline inflation numbers in the next financial year.

"This year we are looking at softer numbers because of the higher base and we are looking at inflation at about 5.2 per cent for the year. Manufacturing prices are likely to show an upward movement going forward reflecting demand pressures," a debt market expert said.

CORPORATE BONDS
Volumes to stay thin

Spreads in the corporate bond market are expected to move up by 50-70 basis points on account of absence in volumes.

Dealers, however, feel that there may not be many new issues this week as participants would wait for better levels. The current spread on a five-year AAA-rated corporate bond stands at 57.51 basis points.

Recap: Issues currently open in the corporate bond market include non-convertible debenture (NCD) issues of Bank of Maharashtra (BoM), Punjab Finance Corporation, Nabard, Karnataka State Finance Corporation, IDBI Ltd and Hudco.

Also on the anvil are tier-II bond issues of BoM and HDFC Bank. The recently closed issues include NCDs by HDFC and Rural Electrification Corporation

GILTS
Yields may perk up

The overhang of tight liquidity and the impact of the last week's 25 basis points hike in reverse repo rate will weigh on the government securities market. The RBI attributed the rate hike to inflation risks from growing credit demand and increasing asset prices.

The yield on the actively traded 8.07 per cent 2017 government paper is expected to be quoted between 7.45 per cent and 7.50 per cent.

Although Finance Minister P Chidambaram has said the hike in reverse repo rate could be reversed in April, investors are sceptical given the robust credit offtake.

Traders expect yields to head higher as investors prepare for potentially higher inflation and more rate rises. The gilts market is also eyeing the auction expected in the first week of February. Traders, however, expect the auction to be cancelled if the government does not step up spending.

CURRENCY MARKETS
Strong $ to dent Re

The rupee is likely to come under pressure this week as the dollar may continue to remain strong in the overseas market against the euro and yen. The local currency is expected to move in the 45.20-45.40 per dollar band taking cues from the global dollar movement and FII inflows.

"Given the Friday's closing levels, the rupee will come under pressure as the dollar gained ground against other currencies. However, it is difficult to predict the rupee's movement this week as the greenback has been very volatile in the overseas market," a dealer said.

Last week, the domestic market witnessed adequate dollar supplies keeping the dollar down, which, in turn, boosted the Indian currency. The dollar held near its three-week high against the yen last Friday, after the upbeat US data on business investment.

This has also stirred expectations that the US Federal Reserve may just up the interest rates even in their January meeting. The dollar was at 116.83 yen and its rise also weighed on other Asian currencies.

This possible rate hike will narrow interest rate differentials between the US and India, which will impact foreign capital inflows, a key factor in boosting the Indian currency.

Another concern is the sustained rise in the crude oil prices. Oil rose above $67 on Friday. India imports two-third of its oil requirements and firm prices are expected to widen its trade deficit to a record $49.7 billion this financial year, say analysts.

Recap: The rupee rebounded on Friday, aided by strong inflows from foreign investments into the buoyant stock market, but a strong dollar in the overseas market muted the local currency's gains.

The rupee ended the week at Rs 44.15 per dollar, up from Monday's close of 44.21. The money and forex markets were closed last Thursday on account of Republic Day. Foreign institutional investors have pumped in more than $570 million so far in January.