Liquidity to be comfortable despite net outflow

OUTLOOK/MONEY MARKETS

Liquidity will remain abundant in the banking system despite fund outflows far outstripping inflows this week.

Foreign exchange inflows are expected to be moderately good this week as well, albeit with less intensity following the slowdown in the equity market rally.

But inflation, which figured at 6.05 per cent last week, has raised concerns over the interest rate outlook across maturities as real interest rates have turned negative.

There will an outflow of Rs 8,000 crore towards on-tap sale of state government paper and Rs 1,500 crore towards auction of state treasury bills.

On the other hand, inflows work out to around Rs 1,400 crore through coupon redemption on gilts. Liquidity might come under slight strain eventually if the forex inflows get subdued further.

Sterlisation activity by the Reserve Bank of India (RBI) to control the appreciation of rupee has been one of the major sources of liquidity in the market.

Call money rates seen at easy levels

Call rates are expected to rule lower as there is not much demand for liquidity. The funds position, in fact, is the only factor that has been perking up the market for quite some time.

Dealers said the on-tap sale of Rs 8,000 crore state loans and the Rs 1,500 crore outflow towards treasury bill auctions this week will not lead to liquidity problems.

Subscriptions at the daily repo auction, which averaged around Rs 25,000-32,000 crore last week, is another indicator of the level of liquidity.

Last week, additional liquidity emerged following yet another intervention by the RBI to rein in the rupee.

The intervention through dollar buying by state-owned banks became intense when the rupee touched 45.39 per dollar.

The rupee, dealers said, is unlikely to keep rising as the dollar has started gaining worldwide following the joint intervention of central banks across the globe to save their respective currencies.

Treasury bills

There are two treasury bill auctions slated this week "" a 91-day paper for Rs 500 crore and a 364-day bill for Rs 1,000 crore "" on October 29.

Participants are of the view that the cut-off rates on these papers will be crucial as it will give a cue on the short-term interest rates.

With inflation going up, the entire yield curve currently is due for revision. This also includes the yield on the short-term papers.

Dealers are of the view that with the outlook on long-term interest rates blurred for some time and equity market headed for some corrective spells, good demand for treasury bills can crop up from foreign institutional investors (FIIs).

This is more so because FIIs view treasury bills as instruments with good arbitrage opportunity and at present, as a good investment opportunity.