Good foreign exchange inflows are expected to help maintain the high liquidity levels in the banking system. While the market has accounted for advance tax outflows slated for this week, there will be inflows owing to the CRR (cash reserve ratio) cut and coupon redemptions.
Advance tax payments are expected to result in outflows of Rs 5,000-5,500 crore. Besides, there will be a 91-day treasury bill auction for a notified amount of Rs 500 crore on June 18. Inflows will be around Rs 1,574.5 crore on account of coupon redemptions of government securities and state government loans.
Another Rs 3,500 crore will be added following the cut in the cash reserve ratio which comes into effect from June 14.
Although the market seems to agree that there is enough liquidity in the system, open market operations (OMO) by the Reserve Bank of India might play spoilsport. With the conversion of ad-hoc treasury bills into government securities, the market is expecting an OMO to suck out excess liquidity.
Another reason for expectations of an OMO is the volatility in the government securities market (with prices going up), which might add to the arbitrage between the foreign exchange and domestic markets.
In fact, the market itself has become lacklustre fearing such a follow up action from the regulator. However, some dealers feel the OMO might be in the next week as there already is a substantial outflow on account of advance tax payments this week.
Steady inflows to keep call rates low
Call rates are expected to rule in 4.75/4.85 per cent range if no other major outflow, barring the advance taxes, occurs. Most players have covered for the advance tax outflows last week itself. Moreover, with the CRR cut effect this week, the outflows will get balanced.
However, if there will be an OMO this week, call rates might come under pressure and go up to 5/5.10 per cent levels.
Overnight rates ruled tight in the 4.95-5.0 per cent range last week, with repo subscriptions sliding. In fact, while the market has discounted the effect of the state loans earlier itself, the RBI statement justifying no repo rate cut prevented players from trading heavily.
Moreover, with forward premium on dollars going up, the market was cautious and demand for liquidity went up from primary dealers and banks to cover short positions.
Expectations of an OMO also prevented the free flow of liquidity.
T-bill yields may toe market rates
Treasury bills yields are expected to go up. There has been a 13-15 basis points upward movement in yields of 91-day and 364-day treasury bills in the recent past.
At the primary auction last week, the RBI had announced a higher cut off rate of 4.98 per cent as compared to the cut off of 4.81 per cent announced the week before.
The cut off yield for the 91-day treasury bill to be auctioned on June 18 is expected to be around the market yield, which is on the higher side.
The rising yields in the short term segment has narrowed the spread between short-term and long-term papers.
The short term segment is in fact witnessing much of the selling while players are holding on to long term instruments.
