Pressure on Re unrelenting

OUTLOOK

US FOMC meet in focus to capture hints for the future; a 25 basis points hike in US Fed rate already discounted; Yield on the nine-year government paper seen in a range of 7.07-7.11 per cent; Advance tax outflows seen at around Rs 12,000 crore.

LIQUIDITY
Outflows cause concern

There is liquidity worth Rs 10,000 crore in the banking system even after outflows arising from government auctions. However, debt market analysts said the market expected this figure to be around Rs 20,000 crore.

The US Federal Open Markets Committee (FOMC) is scheduled to meet on Tuesday. The market has already factored in a 25 basis points hike in the US Fed rate. Players are clearly uncomfortable with oil prices crossing the $60 mark.

Outflows due to advance tax payments and the redemption of India Millennium Deposits (IMD) will have an impact on liquidity this month.

Debt market players feel although the RBI has the onus of tackling any liquidity mismatches due to outflows, the interest outgo on IMDs alone could be approximately Rs 10,000 crore.

Advance tax outflows are expected to exceed Rs 12,000 crore on the back of good corporate performances.

The RBI has announced the auction of 91-day treasury bills for a notified amount of Rs 500 crore and 182-day treasury bills for a notified amount of Rs 500 crore under the regular auction calendar.

As part of its liquidity management, the RBI has decided to cancel the auction of 91-day treasury bills for Rs 1,500 crore and 182-day treasury bills for Rs 1,000 crore, both scheduled for December 14 under the quarterly indicative schedule for the market stabilisation scheme (MSS).

This implies a release of Rs 3,500 crore from MSS account since the 91-day treasury bills issued under MSS on September 14 will be redeemed on December 16. This also implies a release of Rs 1,000 crore from MSS account since the 182-day treasury bills issued under MSS on June 15 will also be redeemed on December 16.

Call in 5.30-5.40 per cent groove

Call rates would come under pressure, following the advance tax outflows after December 15. Call rates are seen at 5-10 basis points above the reverse repo rate and are expected to harden further after December 20. Dealers see call rates moving in a band of 5.30-5.40 per cent.

Recap: The RBI mopped up aggregate bids worth Rs 61,065 crore under its liquidity adjustment facility (LAF) and bids worth Rs 26,575 crore under the second LAF last week. The combined daily average LAF balance was Rs 17,258 crore.

INFLATION
Oil, commodities fuelling rise

Money market players feel that inflation would hover around 4.86 per cent this week. Inflation will slowly inch up on account of higher commodity prices. It is on an upward trajectory for the rest of the year despite last week's softening.

"Apart from oil, prices of other commodities such as gold, copper are also rising and that could weigh on inflation," said a dealer at a foreign bank.

He added "with the economy growing robustly, we could see demand-side price pressure perk up. All these point to a hike of 50 basis points (in the short-term rate) over the next six months."

Recap: The wholesale price index rose 4.54 per cent on an annual basis in the week ended November 26, up from the previous week's 4.32 per cent, due to higher food and manufactured product prices.

Going forward, players expect inflation on manufacturing products to more than make up for any declines and expect the headline inflation number to approach 5.5 per cent by December-end to mid-January.

CORPORATE BONDS:
Issues lined up, but trading volume thin

There are a host of issues lined up in the corporate bond market this week. Traders believe that the spreads on AAA-rated corporate bonds are slated to rise. For instance, the current spread on a five-year AAA-rated corporate bond stands at 51.53 basis points. It is expected to rise to 51.57 basis points this week.

Though the market witnessed a lot of activity in new issuances, trading volumes continue to remain highly subdued, said dealers. The propensity to hold bonds is extremely minimal on account of higher interest rates in global markets and rising oil prices.

State-owned Syndicate Bank will enter the bond market to raise up to Rs 500 crore of subordinated debt to shore up its tier-II capital.

Food Corporation of India (FCI) also plans to enter the bond market on Wednesday to raise more than Rs 1,000 crore, merchant bankers said.

Recap: The players who tapped the bond market last week include Nabard, United Phosphorus and Lupin. State Bank of India is also planning to tap the market soon.

GOVERNMENT SECURITIES
In a narrow groove

The government bonds are expected to move in a narrow range with an eye on the US FOMC decision and liquidity condition on account of advance tax outflows.

The 10-year benchmark bond is likely to be illiquid this week with the yield remaining at 7.07 per cent. The yield on nine-year government bond is expected to move in a range of 7.07-7.11 per cent, dealers said.

The banking system is expecting an outflow of Rs 20,000 crore on account of advance tax outflows. Anticipating a cash-crunch situation, the RBI has cancelled the auction of 91-day and 182-day treasury bills under MSS.

Recap: Yields on government bonds marginally fell amid oil prices rising above $61. The yield on the actively-traded 10.25 per cent 16-year bond fell to 7.3852 per cent from Monday's close of 7.39 per cent.

CURRENCY
Rupee awaiting FOMC cue

The rupee looks choppy this week with FOMC meeting slated for December 13. Although the market has discounted a 25 basis points hike in the US Fed rate, it would keenly watch for hints from the Federal Reserve chairman on its future course. The US Fed will meet again in January 2006 to review the interest rate situation.

The rupee is expected to trade in the band of 46.10/46.30 to a dollar. The dollar looks bullish against other global currencies, which will exert pressure on the domestic currency. The yen and euro are expected to witness some correction in respect of the greenback.

However, dollar's movement will largely depend on the decision of the FOMC. Analysts also see the rupee weakening if oil prices harden.

In the forward segment, premiums look range-bound tracking the rupee unless the Indian currency becomes very volatile. The six-month annualised premium is expected to hover around 0.85 per cent and the 12-month premium around 0.70 per cent.

Recap: The rupee ended the week stronger at 46.21/22 per dollar from Monday's close of 46.33 tracking the dollar in the overseas market. Moreover, the country's trade deficit is increasing adding to the pressure on domestic currency.

"Clearly the market sentiment has changed and the current account deficit will weigh down the domestic currency. There is no need to panic by a 2-3 per cent weakening of the currency," said a forex analyst.