Liquidity squeeze to continue

Liquidity, global oil prices seen weighing on the market; Overnight call rates expected to move in a wider range of 5.10 to 5.30 per cent; The rupee is likely to trade in the 43.80-90 range against the dollar.

MONEY MARKETS
T-bill auctions to tighten liquidity

The money markets this week will continue to grapple with the liquidity squeeze because of the advance tax outflows. The Rs 6,000-crore twin treasury bill auctions on Wednesday will tighten the situation further.

The pressures will ensure that the overnight call money rates will be much above the reverse repo rate. The reverse repo bids are expected to further dip by as much as 40 per cent from the last Friday's level. A respite is likely only next week once the government starts spending its surplus cash balances.

All eyes on credit policy
Call rates would move in a band of 5.10-5.30 per cent amid tight liquidity conditions, against the closing levels of around 5 per cent before the advance tax outflows.

The other pressure point for call rates will be the strong expectations of a 25 basis points hike in the reverse repo rate to 5.25 per cent in the next month's quarterly review of the Reserve Bank of India's (RBI) annual policy. The aggregate reverse repo bids is expected to decline from Friday's level of over Rs 9,725 crore.

Rs 6,000 crore auction ahead
The RBI will conduct a twin auction this week. The 91-day treasury bills auction will be auctioned for a notified amount of Rs 4,000 crore, of which Rs 500 crore will be under the regular auction calendar and Rs 3,500 crore under the market stabilisation scheme (MSS).

The other auction will be of 364-day treasury bills for a notified amount of Rs 2,000 crore. Of this, Rs 1,000 crore will be under the regular auction calendar and Rs 1,000 crore under MSS.

Recap: Inflation rose in the week ended September 10 to 3.53 per cent from 3.16 per cent a week earlier, on account of a rise in prices of petrol, diesel, fruits and vegetables.

Call rates hovered in the 5-5.10 per cent band but surged to 5.40 per cent on Friday as in an unusual situation State Bank of India and several other public sector banks borrowed in the call money market to meet their reserve requirements.

Liquidity was tight as the market witnessed an outflow of Rs 15,000 crore on account of advanced tax outflows. The outstanding amount at the reverse repo window halved to Rs 9,725 crore on Friday.

GOVERNMENT SECURITIES
Bearish mood seen

Analysts expect the market to remain largely stable in the coming week. The rise in inflation, they say, was expected on account of the sugar price hike. As a psychological reaction, yields are likely to rise by 2-3 basis points. Yields are expected to edge up ahead of the quarterly review of RBI's annual policy.

The sentiment in the market is slightly bearish. No major events are slated this week. Another positive factor is that oil prices are likely to see some stability. A trader pointed out that there is certainly no cause for panic in the market.

The yield on the 10-year benchmark paper will move in the 7-7.05 per cent range. Traders are expected to build long positions on expectations of a rate hike in the quarterly review and global oil prices remaining edgy.

Recap: The yield on the benchmark 10-year government paper hovered around 7 per cent. The market did not react much to the 25 basis point hike in the US Federal Reserve's key interest rate.

CORPORATE BONDS
Volumes to stay lower

The market is unlikely to be active in coming weeks with volumes continuing to remain much lower than the normal, an analyst said. There is a likelyhood of an expansion in yields. The corporate debt market has witnessed low volumes in the range of Rs 65-70 crore, against the normal turnover of Rs 200 crore.

Recap: The corporate bond market witnessed low volumes. Average volumes ranged from Rs 65 crore to Rs 70 crore last week as most banks were willing to lend to corporates, instead of investing in the bond market. Banks such as ICICI Bank, Bank of Baroda and Union Bank of India tapped the tier-II bond market this week to boost their capital base.

CURRENCY
FII inflows to prop Rupee

The spot rupee is expected to edge up with a cautious undertone. The market will take cues from the expected robust inflows from foreign institutional investors following steadying of the equity market.

Finance minister P Chidambaram's reassuring comments that the equity market was well regulated and reflected economic fundamentals is likely to prop the stock indices.

Another crucial determinant that will boost the rupee is the widening of the Chinese yuan's trading band against non-dollar currencies to 3 per cent from 1.5 per cent. The dealers expect the rupee to trade in the range of 43.80 to 43.90.

Gains to continue
There will be receiving interest in the forwards market as the rupee is likely to extend modest gains during the week. Dollar flows are expected to be adequate with FIIs likely to continue pumping in sizeable money into the buoyant equity market. Although the stock market looked choppy in the previous week, traders expect indices to move up.

Dealers are, however, cautious of the month-end pressures, which could weigh down the rupee.

Recap: The spot rupee remained rangebound last week hovering around 43.90-91. The rupee looked choppy because of some correction in the stock market. The rupee made moderate gains after the Chinese government doubled the trading band of the yuan against non-dollar currencies. The premia recorded two way movement tracking the spot rupee.