Liquidity to persist

OUTLOOK/ MONEY MARKETS

After a long time, liquidity is coming under the market's scrutiny. Dealers said the banking system was still flush with funds and there was no telling impact on the market's liquidity position.

They, however, added that the funds, which used to come into the market because of the the Reserve Bank of India's (RBI's) sterilisation process in the foreign exchange market, have stopped.

"Incremental growth in the repo outstandings with the RBI has also come down from Rs 70,000-80,000 crore to around Rs 50,000 crore."

Markets players continue to aver that the Central government should give firm policy signals to foreign investors. They said foreign investors might map out new investment plans for India in the absence of a firm government policy.

The rise in interest rates globally may also force foreign investors to pull their funds out of India. Interest rates in some countries, such as Australia and UK, are on the rise. On Thursday, the Bank of England has raised its base rate by 25 basis points to 4.50 per cent.

This is its third rate hike this year. The US Federal Reserve has also signalled a rise in its funds rate from the 46-year low of one per cent at its next meeting to be held on June 29. Yields on government bonds are rising globally indicating a bearish sentiment.

Domestically headline inflation is continuing its uphill path, though last week it rose marginally to 5.03 per cent. There is little scope for the market to expect a lower inflation rate amid volatility in the global oil and commodity markets.

Therefore, liquidity, though abundant at present, has ceased to be a trigger for the bond market for a possible rally in prices.

For the next week, liquidity should not be pose a concern except for hitches in day-to-day liquidity management of banks, dealers said. There will be a total outflow of Rs 11,000 crore from the government securities market.

Though no announcement is made by the RBI, there will be a Rs 9,000 crore auction of government paper as part of the borrowing programme. Also, there will be two 91-day treasury bill auctions, which will be pushing Rs 2,000 crore out of the market.

However, there will be adequate inflows to the tune of Rs 13,054 crore into the banking system on account of coupon redemptions and maturities of government paper.

Call money rates should stay low

Since there will be sufficient fund inflows into the money market this week, call money rates are supposed to stay low. Currently, Rs 50,000-53,000 crore is locked with the RBI as seven-day repo outstandings. The amount will come back into the system in tranches as and when these mature.

But then there will be also outflows to the tune of Rs 11,000 crore due to the scheduled government paper auction. So, the overnight funds rates might come under pressure on the day of the auction.

Overall, the rates are expected to rule lower this seek as there is not much demand for funds. Barring the auction, there are no major causes for outflows. Last week, the overnight rates remained comfortable in the range of 4.25-4.30 per cent.

Active trading seen in treasury bills

There are two 91-day treasury-bill auctions slated for this week. While one auction is for a notified amount of Rs 500 crore under the regular borrowing programme , another will be for Rs 1,500 crore as part of the market stabilisation scheme. Market participants are of the view that the cut-off rates on these papers will be in line with market expectations.

As the outlook on short-term interest rates is bullish, trading in t-bill is likely to be active this week too. The yields on both the long- and short-term bonds are on the rise.

Dealers said that investments in t-bills will give good yield differential for the market players. They, however, added that yields on t-bills are yet to go up with the yield on the 91-day t-bill still hovering around 4.40/42 per cent.