Ample liquidity despite advance tax outflows
Excess liquidity in the banking system will continue despite the estimated advance tax outflows of Rs 6,000-7,000 crore. However, the outflow will affect the quantum of funds going into the repo market.
At present, the liquidity overhang, marked by the daily average repo bids of around Rs 15,000-20,000 crore, will fall to Rs 5,000-7,000 crore. The excess liquidity in the system will once again increase as funds flow back into the system by September 23-24 when the government spends money.
Government security prices are expected to remain subdued and grooved, with an inclination to inch up by five to 10 paise during the week.
The market has been directionless for weeks, and price movements have been dictated primarily by external factors. Banks are not expected to take large, fresh positions just prior to the half-year closing. The 10-year benchmark paper will see yield hover around 7.15-16 per cent, with price rising to Rs 101.55-65.
Rs 2130 crore net inflows are due
The week ahead will be marked by a net inflow of Rs 2,130.2 crore but for the advance tax outflow towards the latter part of the week to the tune of Rs 6,000-7,000 crore.
Total inflows during the week amount to Rs 3,130.8 crore through redemption of 13.82 per cent 2002 paper (Rs 2,138 crore), coupon payment of state development loans (totalling Rs 242.2 crore) and redemption of 364-day treasury bill (Rs 750 crore).
The central bank will conduct a twin auction of 91-day and 364-day treasury bill of Rs 1,000 crore.
Call rates may firm up towards weekend
Call rates will remain range-bound in the beginning of the week at 5.65-5.80 per cent, but will tighten towards the end of the week to 5.75-5.90 per cent as advance tax outflows and reporting Friday coincide this week.
Despite the liquidity overhang, the repo window has received less number of bids, indicative of liquidity being skewed in the hands of a few players.
Dealers anticipate a drop in the average daily repo amounts, which for the past week has been at Rs 18,000 crore, following strain on liquidity because of advance tax outflows.
At the same time, redemption of government paper on Wednesday of Rs 2,000-odd crore will try to match the liquidity outflows, which could prevent call rates from moving above 5.80-85 per cent.
With access liquidity limited in the hands of a few, dealers anticipate the RBI to refrain from accepting all the repo bids. This could see call rates remaining comfortable at the repo rate of 5.75 per cent.
Interest in treasury bills post redemption
Yields on treasury bills will remain constant on the back of advance tax outflows.
Greater interest is expected at the twin auction on Wednesday following the redemption of 13.82 per cent 2002 paper on the same day. The market does not envisage yields to go down from current levels. 364-day bills are expected to stay at 5.85-5.90 per cent.
Interest continues to be in medium-term paper of 10-15 years maturity. Prices of gilts have remained largely constant, and for the week ahead, they will depend largely on inflation figures to be revealed on Monday. The 10-year paper will see yields rise to 7.2 per cent should inflation go up, and drop to 7.15 per cent should inflation rates fall.
