Liquidity to ease; rupee ranged

OUTLOOK

Outcome of FOMC meeting and liquidity will be crucial for the market; The spot rupee is expected to rule in the range of 46.10-35 to a dollar; The benchmark 10-year paper is expected to hover in the range of 7.70-8 per cent.

LIQUIDITY
Advance tax booster

The liquidity situation will be crucial this week. According to market players, it is likely to improve once funds from advance taxes start making way into the financial system.

Foreign institutional investors (FIIs) are likely to bet on the Indian equity market with higher corpus.

It will also have an indirect effect on liquidity as well. If the spot rupee appreciates following FII inflows, then exporters may prefer to realise their dollar receivable.

However, if this does not happen, then the market may have to face odds since liquidity surplus may be difficult to sustain. As inflows from coupon redemption and maturing government security will be to the tune of around Rs 1,020 crore.

Though around Rs 3,500 crore will be sucked out through treasury bill auction, there might be additional inflows if the government prefers to announce auction of recapitalisation bonds to be held in few weeks.

Again, if the US Fed prefers to hike the Fed hike in the forthcoming meeting of the Federal Reserve, the portfolio investors may rethink their allocation to the Asian markets and subsequently to the Indian equity markets.

With the rupee depreciation, importers may stock up dollars for oil payments with the objective of gaining at least from the falling crude prices overseas.

MONEY MARKETS
Rates may rise

The interbank call rates may harden a bit given the outflows towards the payment of advance taxes.

Towards the end of the week, it is likely to soften with funds for advance taxes making way into the financial system through government expenditure.

TREASURY BILLS
MFs to subscribe

The cut-off yield in the auction of treasury bills (t-bills) will be primarily driven by brisk trading in the market. Beside banks, mutual funds have also joined the trading spree of t-bills as MFs have to invest their subscription money in liquid schemes which are primarily short-term in nature.

There are two treasury bills to be auctioned this week "� 182-day t-bill and 91-day t-bill, for Rs 1,500 crore and Rs 2,000 crore, respectively.

The amount forms part of the government borrowing programme as well as the market stabilisation scheme.

Recap: Due to base effect, the inflation for the week ended September 2 fell below 5 per cent to 4.78 per cent as against 5.01 per cent for the week ended August 26. The inflation has come down despite seven per cent rise in prices of fruits and vegetables.

G-SEC
Fed holds the key

The outcome of the Federal Reserve open market committee (FOMC) meeting this week is being keenly watched by the market.

This is because the market feels that the Fed may either hike the base rate or take a relook at its strategy of holding the rates steady.

The perception has been prompted by the recent US economic data which have been encouraging and as per the market expectation indicating a recovery.

Even as there are positive triggers such as falling crude prices and surplus liquidity, at least in the short term, Fed outcome holds the key.

Liquidity is also playing up as an important factor for the market but not at least for the time being.

The market may witness another correction since banks will offload investments and book profit for the half-year end.

In this backdrop, the ten-year benchmark paper is expected to rule in the range of 7.70-8.00 per cent.

Recap: The market witnessed profit taking in a major way last week. It started with profit booking by banks, but later it was triggered by healthy CPI data from the US.

This made the market feel that US may embark on another rate hike.

CORPORATE BONDS
Going bilateral

The corporate bond market continues to witness demand from banks, non-banking finance companies and mutual funds.

This is in addition to the brisk trading in commercial papers and certificate of deposits. Banks are, however, concentrating on issuance in the short and medium-term segment.

While new issues from banks and public sector undertakings continue to hit the market, the placements of these bonds are increasingly becoming bilateral between banks and insurance companies and provident funds.

State Bank of India (SBI) is expected to raise another tranche of Rs 2,000 crore from the market in coming weeks.

In the secondary market, mutual funds are also seen investing in commercial papers and certificate of deposits to deploy inflows to their liquid scheme.

They are mostly targeting the one to three-year papers.

Recap: The spread between the 10-year government security and triple-A bond of corresponding maturity has narrowed to 75 basis points.

RUPEE
Ranged run

After an encouraging set of jobless data last week, the CPI data this week has been at par with market expectation. Therefore, the recent data on the US economy have been dollar positive. The dollar has also started rallying since last week and is expected to continue rising this week as well.

On the other hand, foreign exchange inflows to the Indian equity market have been quite robust. This week, the market expects to witness a similar flow as well. However, things may change if the US FOMC plans to embark on a hike in the base Fed rate.

If the spot rupee appreciates, it may further be endorsed by dollar sale by exporters. However, if the spot rupee depreciates, it might be further pulled down by demand from oil companies.

Crude prices remain a positive trigger but oil companies prefer to make payments at an opportune time.

The forward markets will factor in the perceived interest rate differential between the US and India. In addition, demand from oil companies will add to the pressure.

Further, if liquidity remains under pressure in the domestic market, premiums may flare up since importers need to borrow rupees to pay for booking dollars in the forward market.

In this backdrop, the spot rupee may move in a range of 46.10-35 to a dollar.

Recap: Backed by FII inflows, the spot rupee appreciated last week. While it opened the week at 46.26/27 to a dollar, the closing, propelled by dollar inflows, was higher at 46.14/15. It touched a low of 46.07/08 towards the end of the week.