Liquidity hinges on govt spend, Sebi's PN norms

WEEKLY MONEY & CURRENCIES

Liquidity: All eyes on Sebi

The market is expected to maintain an average surplus liquidity of around Rs 20,000-25,000 crore. Around Rs 20,500 crore will get sucked out of the system through the liquidity-tightening measures of the Reserve Bank of India (RBI) and the government's borrowing programme. Major outflows will take place around October 25 and 26.

Foreign exchange inflows, which were a major source of liquidity in the market, will remain subdued till the market regulator, the Securities and Exchange Board of India (Sebi), clarifies its stance on the participatory notes (PNs) in its board meeting to be held next week. A major correction is expected in the equity market next week.

According to market dealers, most of the FIIs have built up positions through P- notes in sectors that have the FDI cap. This will get unwound at lucrative levels before the market index crashes further.

Call rates: Likely to head north

Call rates are expected to inch up moderately following the concern on liquidity in the market. The major concern is on the state of liquidity after foreign exchange inflows have become subdued after the proposal to curtail investments through P-notes.

However, the liquidity situation may ease gradually, depending on the amount of funds absorbed by the RBI. Dealers expect that if there is a major profit-taking in the equity market, rates may go up.

On the other hand, outflows towards the government's borrowing programme may come back through the government expenditure to neutralise the deficit, if any.

Treasury bills: Trading to pick up

The RBI will auction the 91- and 364-day treasury bills for a notified amount of Rs 3,500 crore (Rs 3,000 crore for the MSS) and Rs 3,000 crore (Rs 2,000 crore for the MSS) respectively.

The cut-off yield on the T-bills is expected to ease a bit since the trading interest has once again come up with chances of the CRR hike going down.

The increased demand for treasury bills will be seen in the secondary market, especially from banks.

However, mutual funds may be in a selling mode since they fear redemption in their liquid schemes from their foreign investor clients after the Sebi proposal on P-notes.

Corporate bonds: CDs galore

In the short term, the primary market may witness a host of issues of certificates of deposit (CDs) from banks to raise short-term funds. This is primarily to take advantage of the falling interest rates in the CD market due to excess liquidity. associate banks of State bank of India. The associate banks of State Bank of India are among those who have already started negotiations for raising funds through CDs.

However, long-term issuers may wait for the interest rate condition to stabilise before deciding on the issues. Dealers point out that issuers may get a better rate if they come to the market because there are few investment opportunities left for banks with a slowdown in the credit offtake.

G-sec: Rally afoot

The market is likely to witness a short rally this week since the fears of a CRR hike are gradually fading with a slowdown in inflows after the Sebi's P-notes proposal. The rally will be spurred by surplus liquidity existing in the system.

On the other hand, the market sentiment may become jittery with Rs 20,500 crore outflows slated for this week. According to dealers, the market was expecting an outflow of around Rs 16,000-17,000 crore from the market since it is left with around 10,000-15,000 crore of excess liquidity.

Re: May be tamed

The market expects a huge correction in the equity market following profit-taking by foreign institutional investors (FIIs).

According to dealers, most of the foreign investors have built up positions through P-notes in those sectors where there is a cap under the foreign direct investment (FDI).

Since the market is uncertain of the Sebi's move on P- notes, FIIs would unwind their positions to avoid further losses. Therefore, it is likely that the market may witness foreign exchange outflows.

Even if the cross-currencies are likely to rally against the dollar, it may not impact the rupee much. This is because internal factors will be predominant this week.

On the other had, exporters, who till now were panicking due to the rupee appreciation, will continue to sell dollars heavily with every dip in the rupee-dollar exchange rate. This would moderate the rupee premia to be paid for booking dollars for future.

In this backdrop, the spot rupee is expected to rule in the range of 39.50-40.00 to a dollar.