Rate hike worries loom large

LIQUIDITY
Not a concern in Q1

While liquidity is not a concern any more at least for the first quarter of the new financial year, it does not help the market much either.

This is because the sentiment is marred by hardening of interest rates. The market has already factored in a 50 basis points hike in short-term interest rates signalled by the reverse repo rate.

The liquidity, however, will be aided by coupon redemptions, foreign exchange inflows and state government spending. Total outstanding of the 14-day treasury bill has gone down from Rs 53,351 crore on March 24 to Rs 38,983 crore on March 31.

This indicates spending by state governments as they are the major entities who invest in 14-day treasury bills, said a banker.

The Reserve Bank of India (RBI) may not intervene any more in the foreign exchange market as the spot rupee has already breached 45 and is currently hovering around 45.19/ 20 after testing lows of 45.40 to a dollar.

However, with an increase in foreign institutional investor (FII) inflows, the money is likely to get circulated in the system, creating additional liquidity.

This week will witness an inflow of around Rs 4,837.12 crore through maturity of government papers and coupon redemptions as against an outflow of Rs 1,000 crore through treasury bill auction.

MONEY MARKETS
Tracking reverse repo

Call rates, rates at which banks borrow and lend for daily fund requirements, is likely to rule around the reverse repo rate of 5.5 per cent.

In fact, driven by liquidity, the rates on other money market instrument such as collateralised lending and borrowing obligation may rule around 5 per cent. The RBI is absorbing around Rs 35,000-40,000 crore from the market on a daily basis.

TREASURY BILLS
Hot favourites of banks

The government will auction the 91-day and 182-day t-bills for Rs 500 crore each as part of the regular government borrowing programme. In the secondary market, treasury bills have become hot favourite of banks to maintain statutory liquidity ratio (SLR) of 25 per cent.

Since these banks need to maintain more securities for liquidity purpose, they are also wary of depreciation which increases proportionately with the maturity of the papers.

Recap: Last week, the cut-off yield on the 91-day t-bill fell below reverse repo rate 5.5 per cent to 5.49 per cent, driven by liquidity and aggressive bidding by banks. Inflation for the week ended April 1 ended at 3.51 per cent even as vegetables, industrial fuel and manufactured products remained expensive.

GOVERNMENT SECURITIES
To remain bearish

The sentiment in the government securities market will remain bearish, weighed mainly by the possibility of a reverse repo rate change.

In the secondary market, though there will be great demand for short-term papers of 3-5 years maturity. This is because some of the private sector banks have trimmed their SLR portfolio to 25 per cent but they may require more securities for collateral to avail of more liquidity.

SLR is statutory requirement to ensure liquidity by banks. These banks are frantically buying short-term government securities fearing depreciation in longer"�term papers with possibility of rising interest rates.

In this backdrop, the ten-year paper is expected to rule in the range of 7.50-7.65 per cent, even falling to 7.40 per cent if the RBI defers hike in the reverse repo rate.

Recap: Active trading was seen in short-term papers while the cut-off yield in the auction of two government securities were higher than the market expectation.

While the ten-year paper got auctioned at 7.59 per cent, the 28-year paper was subscribed at a cut off rate of 7.97 per cent as against the expectation of 7.55 per cent and 7.90 per cent, respectively.

CORPORATE BONDS
Waiting for rate signals

The market will remain quiet as borrowers across the board will wait for interest rate signals from the apex bank during its annual policy announcement.

Therefore, corporates, public sector undertakings and banks will wait for policy signals before finalising their borrowing programme and tapping the market.

After the policy announcement, many banks and financial institutions are likely to tap the market with Tier-II and upper Tier"�II bonds.

However, the market is not quite comfortable with hybrid bond structures, since it is perpetual debt and payment of interest and principal is contingent upon the fact that capital adequacy of the bank remains at 9 per cent or above.

Even as commercial papers are preferred for short-term borrowing by corporates, interest rates have come down from a high of 8.95 per cent to 6.65-6.70 per cent. With the financial year coming to an end, high cost deposits mobilised by banks in the form of certificate of deposits have slowed down a bit.

Recap: The spread between the 5-year triple-A corporate bond and government security continues to be 100 basis point. For the week ended March 31, 2128 CPs were issued for a total amount of Rs 12,767 crore and a total number of 3,442 CDs were floated by banks to raise Rs 36,931 crore as on March 17.

CURRENCY
Re may weaken

Forex inflows and sale of export receivables will be the major source of support for the spot rupee. However, the dollar is expected to gain globally fuelled by a series of robust data last week. Another factor that could have added to rupee weakness is the intervention by the RBI to mop up dollars.

However, with the spot rupee touching 45.19/20 and dollars worth around Rs 50,000 crore having been already mopped up by the central bank in last few months, there is little incentive for the RBI to intervene.

However, if the dollar strengthens in comparison with other currencies, the spot rupee may weaken.

According to dealers, the RBI was aggressively intervening in the market to mop up dollars as the spot rupee was overvalued by 10 per cent.

FII inflows will continue since investors will look for value buying of Indian equity with the market now entering into a cooling off period, said a dealer. Demand for dollars will remain rife with oil prices touching $70 per dollar.

Forward premiums will further soften with easing of liquidity situation. Exporters' sale of dollars will also add to dollar supply in the forward market. Besides the usual demand from the importers, non-deliverable forward (NDF) market will provide arbitrage opportunities as well.

In this backdrop, the spot rupee is expected to rule in the range of 45.00-45.40.

Recap: The spot rupee was volatile during the week. It lost around 50 paise during the week by opening at 44.70 and closing at 45.20.

Dollar purchases by custodian banks for their portfolio investor clients, who were busy booking profit in the equity market, added to the rupee weakness.

Forward premiums fell as exporters sold dollars once the spot rupee crossed 44.70. Abundant liquidity in the market also led to softening of the premium on forward dollars.