Cash-awash system set to lap up 30-year paper
The 30-year government security being auctioned on Tuesday is expected to sail through as the cash glut in the banking system continues.
This is despite another recently issued 30-year paper hardly being traded. The high average daily amount going into repo auctions is another pointer to the funds flush system.
Last week, the average daily repo volumes reared up to Rs 15,526 crore, and across the last fortnight the daily average stands in excess of over Rs 18,000 crore.
As much as Rs 7,098 crore flows back into the system on Monday due to the 14-day repo maturing. This will well take care of the Rs 7,000 crore auction on Tuesday. The second phase of the government borrowing plan kicks off this week with a twin-auction.
The papers on the block include a 7.27 per cent 2013 bond (under multiple price method auction) for Rs 4,000 crore, and a 7.95 per cent 2032 bond (under uniform price method auction) for Rs 3,000 crore, aggregating Rs 7,000 crore.
Inflows continue to inject liquidity
This week will see Rs 2,341.6 crore of net inflows into the banking system, and total inflows in excess of Rs 9,500 crore. This is against estimated outflows of Rs 7,250 crore. Interest payments on government securities and state development loans will result in an inflow of Rs 2,243.6 crore.
A Rs 250 crore 91-day treasury bill auction on Wednesday will offset the inflow of a similar amount through the redemption of an earlier 91-day bill on Friday. In addition, there will be an inflow of around Rs 1,000 crore from the interest on cash balances with the central bank on Tuesday.
Call rates could see a brief tightening
The imposition of restrictions on borrowing and lending by banks in the call money market is not expected to impact rates owing to the high level of funds in the system. Players expect some temporary tightening in the early part of this week due to the Rs 7,000 crore twin auction outflows on Tuesday.
Meantime, a more structured marketplace is on the cards as banks have adequately planned out their asset and liability positions, while the regulations for primary dealers are yet to be laid out. With reduced strain in the call money market, rates are expected to remain range-bound at 5.75-80 per cent.
Banks in need of money can approach the inter-bank term money market and the repo market for funds. Public sector banks have started making enquiries with private sector banks as to whether they are interested in 15-day money.
Treasury bill yields cannot go down from here
Restrictions in the call market will led to an enhanced interest in 91-day treasury bills. But with current yields hovering around 5.78 per cent, there is little room for a rise in prices.
The market did rally last week after the auction on Tuesday, but prices are expected to stabilise as players wait for the Reserve Bank of India to step in. Yields are not expected to dip by more than one or two basis points as players will be cautious about buying at high prices.
The cut-off yields at the auction will be in line with the prevailing market rates. For the 11-year paper, the cut-off is expected at a finer yield-to-maturity of 7.18-20 per cent in view of greater demand for the paper.
The 30-year paper, which is not expected to see much demand, could have a cut-off yield to maturity of 7.9 per cent.
