Liquidity to ease; Re may surge

Cut-off yield in the auction, US treasury yields and forex inflows will be crucial for the market; The spot rupee is expected to rule in a wide range of Rs 45.40-45.75 to a dollar; The benchmark ten-year paper is expected to hover in the range of 7.50-7.65 per cent.

LIQUIDITY
No major worries

Liquidity conditions will ease with growing government expenditure. This is seen from the increasing number of reverse repo bids through which the RBI absorbs excess liquidity from the market.

Liquidity will be further aided by the foreign exchange inflows, which are expected to continue in a buoyant equity market. With the GDP clocking a growth of 8.9 per cent, the domestic economy is likely to witness heavy portfolio investments, said a custodian banker.

An appreciating rupee may push exporters to sell their proceeds to realise the rupee receivables. Therefore, liquidity may not be a problem in the near term.

Going forward, resource mobilisation for banks to fund long-term assets exposure, taken in the form of term loans, may be a problem. This is because the demand for funds by banks will compete with central and state government borrowings.

Therefore, liquidity will be seen as a crucial factor in the coming weeks as well, although oil has ceased to be a concern, as prices are likely to breach the downside below $60 a barrel.

Thus, the concern on inflation on account of oil prices has, for the time being, ceased. However, prices of commodities continue to be a significant factor for inflation.

This week will witness an inflow of around Rs 865 crore as against an outflow of Rs 4,000 crore. If the auction is announced, then there will be a total outflow of around Rs 13,000 crore.

MONEY MARKET
Calls may ease

Following a rebound in the liquidity conditions, inter-bank call rates are likely to ease from their current levels of tightness.

The government expenditure has started in addition to the rollback of additional funds set aside by banks for reserve requirements and provisioning in anticipation of liquidity demand during the seasonal holiday period.

This could be seen from the fact that the weekly growth in bankers' deposits with the RBI, which is essentially the reserve requirements, is 15.3 per cent for the week ended September 29. If the auction is announced, there may be a temporary spike in call rates, owing to daily liquid mismatches.

TREASURY BILLS
Yields to stay benign

The market will witness auction of 91-day and 364-day treasury bills for Rs 2,000 crore each. Since liquidity conditions have improved, owing to government expenditure, the cut-off yield in the 91-day t-bill is expected to remain benign.

The secondary market is likely to witness demand from banks and mutual funds, but the earlier flavour for short-term papers may not continue.

This is because banks are shifting the portfolio to long-term papers with increase in long-term deposits. Therefore, the scope for interest rates to fall is seen much more in the long term than the short term of the yield curve.

Even if foreign banks are seen buying long-term papers, most of them are for trading purposes since yields in the longer term of maturity are on a decline, said a banker.

GOVERNMENT SECURITIES
Bullish demand

The market is in a bullish mode. Oil prices are on a decline and touching $60 a barrel, even as Opec has announced a cut in oil output.

US treasury yields are likely to be a big trigger for the market. Since the non- farm payroll data has been dollar-bearish, the US yields are likely to go down with lesser chances of rate hikes in the future, said a market source.

In the domestic market, there is greater demand by banks to buy government securities, as most of them have trimmed their portfolio to the minimum requirement of maintaining a mandatory statutory liquidity (SLR).

On the other hand, with growing base of deposits and advances, banks are required to maintain SLR much more than what they are maintaining.

Therefore, the supply of government securities has become a positive trigger for the market rather than being a dampener. Life Insurance Corporation has prepared a kitty of around Rs 18,000 crore to invest in government securities.

There is an auction slated to be held this week for Rs 9000 crore. As regards the auction, the market is expecting a 10 to 14 year security for Rs 6,000 crore and a long-term paper of a 20-year tenure for Rs 3,000 crore.

The cut-off yield for the papers will be crucial, as it will indicate the market appetite for the maturity. In this backdrop, the yield on the ten-year benchmark is expected to rule in the range of 7.50 to 7.65 per cent.

CORPORATE BONDS
Buoyant primary market

A string of corporate bond issues from banks and public sector undertakings are likely to continue this week as well. Banks "" Dena Bank, Vijaya Bank, Punjab National Bank, Bank of Maharashtra, Union Bank and Uco Bank "" are in the fray with series of instruments ranging from tier-II vanilla bonds to perpetual tier-I bonds. Primary issues from Power Grid Corporation and Power Finance Corporation are also likely, said a bond dealer.

While the primary market is beaming with activities, the secondary market is lacklustre with no demand either from banks or provident funds.

According to market sources, most of the bonds are over-priced and offer low yields. These bonds are bilaterally placed at offmarket prices with banks or brokers. Life Insurance Corporation has been the only aggressive buyer in this segment.

Employees Provident Fund, which used to be one of the major buyers earlier, is staying away, owing to non-transparent pricing of these bonds, said sources.

Therefore, much of the stock of corporate bonds picked by banks and brokers in bilateral deals is floating in the market, said sources.

RUPEE
Rise on $ decline

The spot rupee is likely to rule with a bias towards appreciation, given strong inflows. Globally, no major data is expected this week, besides the US retail sales and international trade.

Weekly inflows to the US and the Japanese markets will take a break, owing to national holidays in the respective countries. Inflows to India will be aided by a booming stock market index.

The dollar is likely to lose against major currencies, as the non-farm payroll data has been bearish as per the market expectation.

While custodian banks will be seen selling foreign exchange on behalf of the institutional investors, corporates may realise their dollar receivables into rupees at least for the near-term maturity.

This is because exporters will not like to lose on account of rupee appreciation. The pressure for rupee to move upwards may be seen from the non-deliverable forward markets, where dollar is being sold against rupees. Since the rupee is trading at a premium, there is demand to book rupees in Indian market and sell it in NDF.

The forward premia, on the other hand, will continue to rule rangebound. Even as the liquidity situation for rupee has improved with government expenditure, there is a consistent demand from oil and non-oil importers to book dollars so as to take advantage of the appreciating rupee.

Further, with interest rate hikes likely to take a pause in the United States, following the statements from the Federal Reserve, there is an expectation in the domestic market that RBI will be neutral on its stance on interest rates.

Given the inflows, the spot rupee is likely to breach Rs 45.50 and touch even highs of Rs 45.40. On the flip side, if oil prices rise or the dollar demand by importers outstrip the supply, it may see lows of Rs 45.75.

Recap: The spot rupee was on an appreciation mode driven by foreign exchange inflows. While foreign banks were seen selling dollars on behalf of their custodian clients, corporates also realised their dollar receivables in Indian rupees.

With the easing of liquidity situation, the premia paid for booking forward dollars also eased. However, the impact was not much, as the market witnessed consistent dollar demand from importers.