Liquidity worries return to haunt

Cross currency movement and liquidity will be crucial for market movement; The spot rupee is expected to rule in the range of 46.30-46.65 to a dollar; The benchmark 10-year paper is expected to hover in the range of 8.10-8.20 per cent.

LIQUIDITY
Reverse repo to set tone

After enjoying the cushion of liquidity for sometime, the market has suddenly started worrying. According to dealers, in two weeks the liquidity has gone down from highs of Rs 45,000 crore to around Rs 30,000 crore.

There are several reasons attributed to it. While Rs 9,000 crore has been absorbed as part of auction outflow, another Rs 4,000-5,000 crore will be sucked out through advance tax outflows towards the end of the month. The market will get a clear picture of the liquidity situation next week through RBI's reverse repo bids.

Inflation continues to remain modest due to base effect. However the impact of rising prices have started showing in the money supply which is at 19.5 per cent as against 14 per cent last year. There has been a growth of RS 28,382 crore in time deposits with the banks.

It is felt that credit growth, belying projections of a slowdown has started growing at a fast pace. The non food credit has gone up by RS 13,712 crore in a single fortnight ended July 28.

The system will witness an inflow of around RS 77.40 crore as against RS 12,000 crore.

CALL RATES
Firm-up likely

The interbank call rate is likely to firm up as outflows far exceed the inflows. Even as the liquidity is in surplus, the number of reverse repo bids have started showing signs of slowing down.

There will be an auction outflow to the tune of Rs 6,000 crore. Therefore for most part of the week, the market players will be anxious in lending in the call money.

TREASURY BILLS
Fund concerns not to impact cut-off

There are two treasury bills to be auctioned this week - 364 day t-bill for Rs 2,000 crore and 91 day t- bill for Rs 2,000 crore. The amount forms part of government borrowing programme as well as market stabilisation scheme.

The cut-off in the yield is not going to be affected by the concerns of liquidity and rising rate scenario as there is acute demand for t-bills by banks both for investment purpose and for maintaining the SLR without having to provide for the market risk.

Recap: India's wholesale price index (WPI) eased to 4.61 per cent for the week ended July 29, from 4.67 per cent a week earlier. The prices of pulses, sugar and wheat remain a concern for the government, nevertheless.

GILTS
Bearish trend likely to persist

The government securities market may remain bearish as the market had just entered a mode of rally when the auction was announced.

The RBI has issued long dated papers - 8.33 per cent 2036 and 8.07 per cent 2017 for which banks do not have much appetite due to lowering of the average duration of their investment portfolio. Most of the banks have brought down the portfolio to 3-4 years.

Secondly, the market is anxious of the liquidity in the system as the numbers of the reverse repo bids are gradually going down.

On the other hand, there is no scope of interest rates to come down as a policy measure as the money supply which alternately reflects the inflation is higher at 19.5 per cent.

In this backdrop, the 10-year benchmark paper is expected to rule in the range of 8.10-20 per cent.

Recap: Post Federal Reserve open market committee meeting last week, the market plunged into a rally pulling down the yield on the benchmark 10- year paper - 7.59 per cent 2016 to a low of 8.08/8.09 per cent. However it moved up later with the auction announcement this week.

CORPORATE BONDS
Routine floats to stay

There are some private corporates investing in infrastructure and special economic zones learnt to be interested in raising funds from the corporate debt market.

However, according to market players, they are yet to firm up their plan. Otherwise, banks, raising tier II bonds and certificate of deposits for medium term and short term funds, and corporate, issuing commercial papers, continue to be only issues in the market.

The market is set to witness a string of perpetual debt in the market which have found favour with the insurance companies and provident funds.

Perpetual debt are quasi equity and irredeemable as they do not have a maturity date. Investors could exit only after selling it in the secondary market.

These bonds form part of the tier I capital of the bank which comprise equity and reserves unlike pure debt that is part of tier ii capital.

Recap: The spread between the 10- year government security and triple A bond of corresponding maturity has narrowed to 70 basis points.

This is because while the rally in the 10- year gilt witnessed a price rally last week, the yield consequently moved down , thus widening the gap.

RUPEE
Rangebound run

The spot rupee is expected to rule rangebound with an appreciation bias. Once again, the trigger is cross currencies.

Even as yen is likely to weaken this week following the Japanese authorities' decision to go slow on the interest rate revision, euro and pound are likely to strengthen as both European Central Bank ( ECB) and Bank of England ( BoE) are poised for further upward revision in interest rates.

While analysts have revised their medium term outlook for yen , they still feel that euro may move up to 1.2680 to a dollar compared to 1.2720. Yen was likely to have reached 109 to a dollar but the projections now stand revised to 112, said an analyst with E-Mecklai.

On the other hand, Asian markets in general are doing well along with the Indian equity markets. South Korea has raised rates and this gives additional push to the rupee currency.

However, there will be an upward bias for the premium on forward dollars paid in rupee terms. This is because fundamentally the interest rate differential between India and the US has widened after July reverse repo rate hike and Fed's decision to maintain status quo.

Moreso, there is also pressure felt on the liquidity in the domestic market following auction outflow last week. This perception , if persists might get factored into the rupee interest rates, thus pushing the premium further.

In this backdrop, the spot rupee is expected to rule the range of 46.30-46.65 to a dollar

Recap: The spot rupee , after Fed rate remained unchanged, rallied to a high of 46.40 to a dollar but depreciated after wards. The premium on forward dollars continued to remain high due to dollar demand. After rupee appreciated to dollars, importers bought heavily so as not to miss the opportunity.