Liquidity sets to surge

MONEY MARKETS

Liquidity in the banking system should surge this week as money flows in through government expenditure and the special deposit scheme.

The maturity of public deposit schemes of central government undertakings and the return of advance tax payments worth Rs 10,000 crore to the banking system this week would further bolster the funds level.

If that weren't enough, the government is also maintaining a surplus of Rs 22,545 crore with the Reserve Bank of India (RBI).

But despite all this, dealers remain cautious because an outflow of about Rs 11,000 crore is due this week through gilt and treasury bill auctions and the market stabilisation scheme (MSS).

Monish Tahilramani, treasury head of HSBC, said, "After years of continuous decline, rupee interest rates have taken a U-turn. The reversal was unexpected and dramatic. The reason could be the derivatives markets coming of age, both in terms of volumes and number of participants. More and more players are using these markets to hedge their interest rate positions."

Call rates to stay low

Call money rates are expected to remain easy due to the expected surge in liquidity.

The overnight rates might harden after the auctions are over.

Treasury bills

There are two sets of 91-day and 364-day treasury bill auctions slated for this week. The 91-day bills would be sold through a Rs 2,000 crore auction (Rs 500 crore under the government borrowing programme and Rs 1,500 crore under MSS).

The longer 364-day bill too would suck out another Rs 2,000 crore.

The cutoff rates on these issuances are expected to be on the higher side due to the bearish sentiment prevailing.

Meanwhile, brisk trading may bring down the yields in the secondary market.

Recap: Liquidity was extremely tight during the beginning of last week with players borrowing funds from the RBI.

Call rates ruled close to the repo rate of 6 per cent. The 91-day treasury bills saw a cut-off yield of 5.39 per cent.