Rate uncertainty wearing off

Dollar movement globally and scheduled auction announcement will be crucial for market movement; The spot rupee is expected to open in the range of 46.40-80 to a dollar; The benchmark ten-year paper is expected to hover in the 8.20-25 per cent range.

LIQUIDITY
Rate dilemma subsides

While liquidity continues to be comfortable, the uncertainty over interest rates seem to have subsided after the Reserve Bank of India (RBI) increased the reverse repo rate toeing the market expectation last week.

However, the apex bank termed the move as pre-emptive and not an urgent policy measure taken in response to the present situation. On the other hand, the market has discounted the fact that the Federal Open Market Committee meeting next month may hint at an end to the rate hiking spree in the US.

Market players also said that even if the Fed governor prefers to hike the rate, it will be a final call for some time to come.

In this light, the bankers are of the view that the RBI may not embark on any further upward rate revisions in the medium term if the inflation rate does not go beyond the predicted range.

However, action by the European Central Bank and the Bank of Japan will be important. Because ECB is likely to continue with another hike in its base rate to be announced in a meeting next month.

So for the time being, the market is comfortable with the RBI's stance on the interest rate as was evident from the overwhelming subscription to the auction of 7.55 per cent 2010 government stock last week.

The week will witness an inflow of Rs 739.8 crore against an outflow of Rs 4,000 crore. The outflow may go up if the auction is announced.

CALL RATES
Ranged run at 6.05-6.10%

The interbank call rates will continue to remain in the range of 6.05-6.10 per cent. With the reverse repo rate being hiked to 6 per cent, banks with portfolio of government securities are finding it cheaper to borrow from the collateral lending and borrowing obligation instrument of the CCIL.

This is because funds under CBLO are available at 5.4-5.5 per cent against the interbank rate of 6.05"�6.10 per cent.

Some banks are even using this arbitrage - difference in interest rates to borrow funds from CBLO and lend it in the call market and earn a spread.

TREASURY BILLS
Lower cut-off seen

There are two treasury bills to be auctioned this week "� 91-day and 364-day t- bill for Rs 2,000 crore each.

The auction is expected at a lower cut off than the current yields. This is because the purpose of investment and maintaining reserve requirement of SLR, banks are actively trading in treasury bills to avoid valuation loss in the balance sheet.

Recap: Inflation for the week ended July 15 ended at 4.52 per cent against 4.68 per cent the week before and 4.45 per cent for the corresponding period the year before.

GOVERNMENT SECURITIES
Peace on rate front

The government securities market on the interest front is beginning to heave a sigh of relief. With the US data not indicating a buoyant economy, chances of another rate hike by the Federal Reserve is unlikely.

According to market players, even if the August 8 FOMC meeting results into another rate revision upward, it might be the end for some time to come.

The data have been quite contradictory. While GDP growth in the US is 2.5 per cent against an expectation of 3.2 per cent, inflation has figured a bit high at 4.1 per cent.

In the domestic market, auction announcement is expected which might weigh heavy on the market sentiment till the actual tenure of the government paper and size is made. In this scenario, the yield on the ten-year paper is expected to move in the 8.20-25 per cent range.

Recap: The government securities experienced a rally in prices after the RBI policy announcement.

Since the hike in reverse repo was in tune with the market expectation, both the treasury bill and government securities sailed through comfortably.

CORPORATE BONDS
Banks raise the pitch

The market continues with the trend of banks raising funds for strengthening their tier II capital. Tier II capital comprises debt components. PowerGrid was one of the few public sector undertakings which raised around Rs 60 crore through 10-year bond at 9.25 per cent.

In the secondary market, the demand is mainly seen for commercial papers and certificate of deposits. While there is ample liquidity, the market players are wary of investing in the medium and long-term papers.

This is due to upswing in the interest rate curve. Tracking the rising yields of the benchmark government securities, the yield of the corporate bonds have also moved up.

While interest rates in gilts can change on a daily basis responding to various policy announcements and market movements, it is not so swift for the bonds. The trading volumes are not so high to create interest rate changes and thus they continue to remain at the higher end of the yield curve.

Recap: The spread between the 10- year government security and triple-A bond of corresponding maturity has widened to 100 basis points as the 10- year gilt witnessed a price rally last week, the yield consequently moved down, thus widening the gap.

RUPEE
Northward bound

The spot rupee is expected to appreciate this week following strong cross currency movement. Since the economic data from the US have indicated a slowdown in the US economy, the dollar is likely to take a beating against all other major currencies, primarily the yen and euro.

The yen has already moved below 115 to a dollar and if it continues at these level, the rupee may even touch 46.40, said a dealer with e- mecklai.

The US GDP for the second quarter has figured at 2.5 per cent as against the market expectation of 3.2 per cent.

On the other hand, crude remains stable at $76 per barrel though hovering in the higher zone. Global markets have factored in the crude prices at these levels.

However, if oil prices shoot up further, the rupee along with other currencies will lose. The month end demand will cease next week therefore taking off pressure on the rupee.

Forward dollars will continue to remain stable as the market has discounted the fact that rupee interest rate is going to stabilise around the current levels.

Some are even optimistic that RBI may not embark on further rate revisions for some time now. Oil still remains a critical factor.

If the crude prices jump, panic demand from oil importers may result in surge in forward premia. In this backdrop, the spot rupee is expected to rule the range of 46.40-46.80 to a dollar.

Recap: The spot rupee gained during the week to close at 46.65 tracking the strengthening yen and euro against the dollar.

The rupee could have gained more but for the month end demand from importers. Since the RBI raised the reverse repo rate, forward premia continued to remain high.