Auction to have no impact on liquidity
Liquidity in the banking system will be more than comfortable this week despite the Rs 7,000 twin auction of government paper. Prior to the auction, there will be an inflow of Rs 5,495 crore from the 14-day repo that took place on August 12. This will add to an already highly liquid market, where the average daily repo auction bids stood at Rs 12,700 crore last week.
Such high bidding at repo auctions is expected to continue this week too, with players seeing total bids in the band of Rs 10,000-15,000 crore every day this week.
Dealers see liquidity tightening only if there is any negative development along the country's border. Since Friday, players have shown some angst over the developments on the border.
Meanwhile, the Reserve Bank of India (RBI) governor had on Friday said that the central bank was willing to take devolvements at government paper auctions and its overwhelming intention was to keep liquidity in the system comfortable. This has given a boost to the market.
Inflows to increase liquidity
This week will be marked by a net inflow of Rs 9,939 crore even after a twin auction of 15-year and 30-year papers and 91-day treasury bills.
Dealers said with more than Rs 10,000 crore going into the repo market on a daily basis, and the Rs 5,495 crore coming in through the 14-day repo, the auction of government paper on Tuesday will be well-subscribed.
The RBI will sell a new 15-year stock for Rs 5,000 crore and will also auction a new 30-year stock on Tuesday. The central bank, having recognised the market sentiment, decided to cut down the issue size of 15-year paper from the earlier Rs 6,000 crore to Rs 5,000 crore.
Further, the central bank also decided to come out with a longer paper of 30 years instead of the scheduled 20-year bond as stated in its issuance calendar.
Total inflows of funds this week will be to the tune of Rs 17,189 crore following redemption and coupon payment of central government, repo, treasury bills and state government papers. The redemption of the 11.15 per cent 2002 government paper on Saturday will pump in Rs 10,557.5 crore into the system.
There will be an inflow of Rs 708 crore following coupon payments on 13.85 per cent 2006A and 11.4 per cent 2008 government papers. There are also a series of coupon payment from state loans (SL) and state development loans (SDL), including Rs 131.5 crore from 11.5 per cent SDL 2008, Rs 11.75 per cent SDL 2010 as well as Rs 34.7 crore from state development papers of Tamil Nadu, Punjab and Maharashtra.
The RBI calendar also marks out a treasury bill auction of 91-day on Wednesday of Rs 250 crore and a 91 treasury bill redemption on Friday.
Call rates to remain at repo levels
The excess liquidity in the banking system will continue to keep the call rates around 5.6-5.7 per cent. The market has been hoping for a repo rate cut but the RBI governor Bimal Jalan scotched any such expectations on Friday when he categorically said "there were no plans to cut the bank rate or repo rate at this point of time".
Overnight interest rate swaps are likely to remain stable at these levels, after having hit a record low on Friday on news that the central bank was willing to take devolvements at securities auctions. One-year swaps indexed to the overnight rate were quoted at 5.96/6.01 per cent, off a high of 5.97/6.02 per cent.
Treasury bill yield curve to steepen
The yield curve for treasury bills will remain flat at the shorter end but is likely to steepen at the longer end. Dealers said with ample liquidity in the system, it is unlikely that the yields -- having a mark-up of 10-15 basis points over call rates -- will go down dramatically.
There will be greater demand for short-term paper following the redemption of 11.15 per cent 2002 security coming up for redemption on Saturday.
Of late, however, there had been little interest shown in short-term papers because of a lack of gap in the yields between call rates and short gilts.
