Mint Road's role in the forex market to be critical

OUTLOOK: MONEY MARKETS

Liquidity will be abundant this week too, but participants don't seem very enthused by the situation. This is because they haven't been able to gauge the direction of interest rates, especially after the US Federal Reserve's exercise in semantics. It seems to be preparing the world for a gradual "" or "measured" hike in its funds rate.

The results of the general elections also hang heavily on sentiment.

Inflation was at 4.26 per cent last week against 4.4 per cent the week before, but the bond market did not witness buying demand on account of this.

Surplus funds in the money market currently stand at Rs 75,000 crore approximately, and are locked behind the Reserve Bank of India's seven-day repo window.

Foreign exchange inflows have been subdued since exit polls two weeks back. This, too, indicates uncertainty. Forex funds have been the liquidity generators of the Indian money market system for some time now.

While the amount locked in repos will return to the market in tranches as and when they mature, lack of outflows will ensure comfort as far as liquidity is concerned.

Outflows this week will be around Rs 4,000 crore through two treasury bill auctions: Rs 1,500 crore under the government's borrowing scheme and another Rs 2,500 crore under the market stabilisation scheme.

Inflows will be around Rs 2,850.88 crore.

Easy call ahead

Call money rates are expected to rule low as there is not much demand for overnight funds. Owing to the seven-day repo, players are preferring to lend in the call market to keep themselves liquid.

With the interest rate scenario uncertain, there is little scope for volatility. This is because dealers are dabbling in intra-day trading, buying and selling quickly rather than building portfolios with a long term perspective.

Participants are also preferring to remain invested in the collateralised lending and borrowing instruments of the Clearing Corporation of India.

Market-related treasury bill cut-offs forecast

There are four treasury bill auctions slated this week. This includes auctions of 91-day and 364-day bills under the government's borrowing programme for Rs 1,500 crore, and auctions of the same bills for Rs 2,500 crore under the market stabilisation scheme. All are scheduled to be held on May 12.

Participants are of the view that the cut-off rates on these papers will be in line with their expectations.

Based on the cut-off seen last week, dealers said this week's rates will be low too.

Last week, the cut-off was pegged higher at 4.40 per cent, which the dealers attribute to excess supply of paper in the short term. The market rates for the 91-day issue have been ruling lower at 4.37/38 per cent.