Liquidity levels adequate

OUTLOOK: Money markets

The liquidity in the banking system is just adequate as can be judged from the gradually receding reverse repo bids. Reverse repo is an instrument through which the Reserve Bank of India (RBI) sucks out excess liquidity from the market.

According to dealers, the liquidity generated in the system through incremental capital inflows has taken a back seat. This is because the RBI has not been intervening to buy dollars, which would have resulted in excess rupee liquidity.

Dealers feel that the lack of intervention by the RBI, which has allowed the rupee to appreciate against the dollar, is an effort to reduce the country's import bill for oil. This will in turn lower the inflationary pressure. The inflation rate is likely to be moderate in the coming weeks due to a higher base.

The inflow into the system for this week is Rs 8,317 crore, while the outflow is Rs 4000 crore. There is no auction of dated securities slated for this week.

Call rates set to ease

Interbank call money rates - the rates at which banks lend and borrow for their daily fund requirement "" is likely to ease from the current levels of 5.10-20 per cent. Even as the liquidity is just adequate, there is no pressure on call rates to rise as this is not a reporting-Friday week.

If the government starts spending the funds remaining in credit with the RBI, the system would see a surge in liquidity. If the liquidity continues to remain low, the RBI may consider stopping the sucking out of funds through the market stabilisation scheme.

T-bill auction yields seen moderate

There are two treasury bills to be auctioned this week for Rs 3,500 crore - 91-day paper for Rs 2000 crore and 182-day T-bill for Rs 1500 crore.

The cut-off yields for the auctions is expected to be moderate. Despite the bullish sentiment in the government securities market, brisk trading in treasury bills in the secondary market will push down yields at the auctions. Yields in the short term of the yield curve are realigning to the moderation in the long term.

Recap: Reverse repo bids fell to around Rs 11,000 crore following the reporting Friday. Interbank call rates inched up to 5.10-5.20 per cent.

Inflation for the week ended April 30, 2005, was at 5.67 per cent as against 5.91 per cent in the week before.