Liquidity is a non-issue for now

OUTLOOK/ Money Markets

The liquidity situation will not be the crucial factor for the bond market, at least in the near future. The Reserve Bank of India (RBI) has been aggressively mopping up funds through scheduled and unscheduled auctions of market stabilisation bonds and treasury bills.

Prices of gilts are set to inch up this week, offsetting concerns over a renewed rise in inflation. There may be some selling reacting to the inflation data, but the surfeit of cash in the system and lack of parking avenues will keep the money flowing into gilts, according to dealers.

Repo auctions seem to have come in handy for the RBI for market management. Receding subscriptions seems to be signalling a gradual effort on the part of banks to manage their funds instead of just parking them in repos.

Collateralised lending and borrowing obligation, a product of the Clearing Corporation of India Ltd, is expected to pick up in volumes. Unlike repos, this instrument enables rollover of positions.

Forex inflows are expected to boost liquidity even if they do not make way in to the banking system. At present, besides foreign institutional investors, corporates are set to bring in their overseas borrowing proceeds that are raised through external commercial borrowings. Moreover, exporters are keenly bringing in their receivables in order to avoid any erosion in their earnings.

Easy run continues for call rates

Interbank call rates are expected to rule soft even though the liquidity situation seems to be gradually weakening.

This is because the rates are moving in the higher ranges with the reverse repo rate at six per cent.

With the repo period being extended to seven days, players are of the view that volumes in the call market will go up as banks will be deploying excess funds there.

Dealers also said that banks do not want to be caught on the wrong foot and are therefore preferring to retain cash.

Repo volumes have been going down day by day and at present the daily volume at the seven-day auction is in the Rs 8,000-9,000 crore range as against a surplus of Rs 50,000 crore at the one-day repo.

The market is of the view that the repo volumes at the one-day auction is getting split into seven days to be put in each of the seven-day repos.

Treasury bill cut-offs heading northwards

There are four treasury bill auctions slated for this week - two 91-day and two 364-day issues. While one set of 91-day and 364-day papers are slated to be auctioned this week, a 364-day issue was scheduled under the market stabilisation scheme (MSS).

The RBI has announced an unscheduled 91-day bill auction for Rs 1,500 crore last week. The cut-off rates are expected to be competitive going by the market yield of bills "" they could jump up due to the abundant supply of short-term papers.

Nevertheless, they remain under scrutiny owing to the high cut-offs witnessed in securities under the MSS last week.

Treasury bills have emerged as one of the attractive options from the arbitrage point of view with the one-year forward premium ruling below one per cent.

Dealers are looking at them as a good investment option at a time when the long-erm interest rate outlook is uncertain.