Since the credit requirement of oil companies is growing both in foreign exchange and in rupee terms, the Reserve Bank of India (RBI) has offered a direct funding facility to them through the open-market window.
According to dealers, even if the open-market window is offered, funds have to be channelled through the market. Therefore, in any case, it will affect overall liquidity. Last week, demand for short-term working capital loans from oil firms kept public sector banks away. Besides, there is no foreign exchange inflow into the market either.
However, the market is optimistic of a fresh dollar inflow from foreign institutional investors (FIIs) into the equity and debt markets, with the registration norm for FIIs widened by including NRIs within the category and with the debt investment limit for FIIs increased by $3.3 billion.
So, the system will witness an inflow of around Rs 2,798 crore as against an outflow of Rs 14,000 crore. Besides, additional liquidity will also be absorbed from the system through sale of dollars by RBI, said dealers.
G-sec: Bearish trend
The government securities (G-sec) market will continue to rule with a bearish sentiment since inflation has been ruling consistently high and growth data have been good.
A good GDP data augur well for credit offtake, but is counter-productive for investments. Moreover, banks will first be busy meeting the short-term credit requirement of oil companies rather than investing in government papers.
RBI will auction the 8.24 per cent 2018 paper for Rs 6,000 crore and the 6.95 per cent 2032 paper for Rs 4,000 crore. The market expects the yield on the ten-year 8.24 per cent 2018 benchmark paper to firm up to 8.10-8.12 per cent.
Dealers expect good demand for govt paper once the ten-year yield reaches around 8.11-8.12 per cent. In this backdrop, the yield on the ten-year benchmark may rule in the range of 8.02-8.10 per cent.
Rupee: In a range
The government has relaxed norms for the rupee expenditure of foreign currency loans under the external commercial borrowing (ECB) route.
Besides, the Securities and Exchange Board of India (Sebi) has widened the entry norms for FIIs into the Indian market. These measures are expected to augment the foreign exchange inflow into India. Even as crude oil prices are expected to go up, RBI has opened a special window for oil companies to buy foreign exchange without disturbing the market dynamics in the rupee-dollar exchange rate.
Thus, the dollar demand by oil companies may not lead to a faster depreciation of the rupee. Importers may not rush to cover long-term dollar positions as they expect the rupee to appreciate.
On the other hand, exporters are likely to rush to the forex market for selling their dollar receivables. In this backdrop, the spot rupee is expected to rule in a wide range of 42.10-42.60 to a dollar.
Call rates: Headed north
Call rates, at which banks lend and borrow funds from each other, are likely to firm up following the tight liquidity. Dollar sales by RBI to stem the rupee deprecia-tion may absorb excess liquidity from the market.
Besides, the outlook on liquidity is also bearish. This, in turn, may force RBI to hike the cash reserve ratio (CRR) once again. Call rates, therefore, may rule in the range of 7-7.5 per cent.
T-bills: Good demand
Cut-off yields in treasury bills (T-bills) may inch up by 5-10 basis points following a tightness in liquidity. According to dealers, the tightness is more of a short-term trend that affects short-term instruments more than the long-term ones. There will be no issuance of T-bills for the Market Stabilisation Scheme (MSS) to suck up excess liquidity.
In the secondary market, there will be a good demand for treasury bills both from banks and mutual funds. As the outlook on long-term liquidity and interest rates are uncertain, banks will be cautious to make investments in long-termb onds. On the other hand, investments in T-bills are immune to the market movement of interest rates.
Corporate bonds:
Most of the banks are expected to rush to the corporate bond market to raise funds to tide over the tight liquidity and provision for the advance tax outflow in June. The market for certificates of deposits (CDs) may hence witness an inching up of yields by 5-10 basis points, at least in the beginning of the week.
They may start softening with the easing up of yields of government securities towards weekend.
Currently, the one-year CD is ruling around 9.10-9.20 per cent and the one-year commercial paper (CP) is offering 30 basis points over the CD rate for a similar maturity.
Barring a few issues like those of Power Finance Corporation (PFC) and Rural Electrification Corporation (REC), long-term bond issuers may like to wait till the time the liquidity situation improves to avoid paying a high interest rate. PFC and REC may tap the market to raise funds through three- and five-year bonds.
