Liquidity hinges on RBI measures

WEEKLY MONEY & CURRENCIES

LIQUIDITY
Crunch remains

Liquidity in the market will be just adequate. According to dealers, even if the market is expecting an inflow of Rs 20,000 crore through the redemption of government securities, the outflows are finely matched.

Last Friday's gilt auction will absorb around Rs 8,000 crore on Monday and if the MSS bonds are announced, it may absorb an additional Rs 2,000-6,000 crore. The market is, currently, short of funds by around Rs 5,000 crore, as is evident from the liquidity infusion under the repo window of the RBI.

Besides, the market will be setting aside funds for the next reporting Friday, which starts this week. However, if there is no announcement under the MSS or a CRR hike, the market may then breathe easy till at least the advance tax outflows in the first quarter of the financial year on June 15.

Moreover, the government is not in a cash-surplus mode as was seen during the beginning of the financial year. The RBI has doubled the ways and means advances (WMA) limit for the first quarter of the financial year from Rs 10,000 crore last year to Rs 20,000 crore this year.

CALL
May stabilise

Call rate is expected to stabilise around 7-8 per cent if there are no liquidity-tightening measures announced by the RBI. Otherwise, it may inch up to 9 per cent. Liquidity will remain comfortable if the RBI desists from intervening in the gilts market.

The market will witness an outflow of around RS 11,500 crore (Rs 8,000 crore towards dated security auction last week and Rs 3,500 crore towards T-bill auction) against an inflow of Rs 23,638 crore.

TREASURY BILLS
Auction afoot

The RBI will auction 91-day and 182-day T-bills in the market to raise a total of Rs 3,500 crore, both as a part of the government borrowing programme and the liquidity absorption to tackle inflation under the MSS.

The cut-off yield in the 91-day T-bill is likely to rule in a range of 7.65-7.80 per cent, while the upside of 7.80 per cent hinges on the odds of CRR hike or the announcement of MSS bonds.

GOVERNMENT SECURITIES
In Bullish mood

The market sentiment will remain bullish even if there are strong expectations of liquidity-tightening measures to be announced by the RBI. A fresh trigger for trading is likely to come from the demand for government securities for SLR requirements and to replace the 11.90 per cent 2007 paper, which is maturing on May 28.

According to dealers, this is one of the significant securities in the banks' portfolio. Given the maturity figure of Rs 20,660 crore, most of the banks would be looking for a suitable replacement, said dealers.

Moreover, the market expects the government to be in a borrowing mode. This is because the WMA limit for the first quarter has been doubled by the RBI. WMA is a temporary credit facility provided by the RBI to the government. The government will have to keep on borrowing up to June 15 till it receives inflows in the form of advance tax collections.

However, if there is an announcement either of a bond auction under the market stabilisation scheme or a hike in CRR, the yields of government security may then firm up.

In this backdrop, the yield on the ten-year benchmark is likely to rule in a range of 8.12-8.20 per cent.

CORPORATE BONDS
Issues galore

June is likely to witness long-term bond issues to the tune of Rs 3,000-4,000 crore. This includes most of the public sector undertakings, prominent among them being Power Finance Corporation, Power Grid Corporation, Rural Electrification Corporation and Indian Railway Finance Corporation.

According to dealers, the PSU issues are delayed since most of them have to get their balance sheets finalised.

Among the banks, State Bank of India is expected to hit the market this week with upper tier-II bonds to raise around Rs 1,000 crore. The bank is offering 10-15-10.20 per cent for 10 years.

The issue of certificate of deposits (CDs) has come down substantially since the end of the previous financial year. Mutual funds are mostly investing in CDs and the one-year CD is traded in a range of 10.25-10.30 per cent.

RUPEE
Month-end pressure

The rupee is poised in a balance between appreciation and depreciation. The market is expecting a tightness in rupee liquidity. In such a scenario, some of the smaller banks may even resort to swapping dollars for rupees, pushing the spot rupee up.

If there are measures, such as a CRR hike, they may push up the rupee as outlook on rupee interest rates will be hawkish. The equity market is expecting a decent supply of dollars through portfolio investors.

On the other hand, the month-end demand from oil companies will put a counter-pressure on the rupee to depreciate against the dollar. Moreover, the RBI will be keenly observing the rupee, which is expected to breach 40.50 any time, given the inflows. Any level above 40.50 may see the RBI intervention.

The movement of the forward premia, on the other hand, will depend on the RBI measures.

If the rupee liquidity is tight, it will push up the premium for forward dollars. However, if there are no MSS announcements or CRR hike, the premia are expected to rule easy, given comfortable liquidity conditions.

In this backdrop, the spot rupee is expected to rule in a range of 40.40-40.80 to a dollar.

Recap: The spot rupee remained rangebound since the dollar supply was matched by the RBI intervention. Being the middle of the month, the market did not witness much demand from oil companies either. With easy liquidity, forward premia remained low.

Post-Script:Inflation for the week ended May 12 fell to a five-month low of 5.27 per cent.