RBI moves may strain liquidity

Liquidity
Likely to tighten

Liquidity is expected to remain tight during the week. This is because even if the outflow towards advance taxes may start flowing back into the system following the government expenditure, it will be absorbed by the Reserve Bank of India through the Market Stabilisation Scheme (MSS). The RBI has been calibrating the liquidity in the system to prevent its impact on money supply and inflation.

Dealers also added that additional liquidity would get generated through foreign exchange inflows, both corporate flows and portfolio investments, but the MSS might suck out surplus money.

Dollar liquidity, on the other hand, may increase, as banks will be using dollars to generate rupee funds.

Call rate
May firm up

The inter-bank call rate is expected to remain firm this week, owing to a tight liquidity situation. Banks will be seen availing of liquidity through the repo route of the Reserve Bank of India (RBI). The tightness is likely to continue because the RBI has signalled monetary measures to curb excess liquidity to contain inflation at any cost. Banks, on the other hand, will handle liquidity cautiously till the end of the financial year. The repo route is the liquidity infusion mechanism of the RBI.

Treasury bills
Auction afoot

The RBI will issue 91-day and 182-day T-bills for auction in the market to raise a total of Rs 3,500 crore.

The cut-off yield in the T-bills is likely to inch up, as the market is currently witnessing a tight liquidity condition. Even if the liquidity may improve following the expected intervention of the RBI to contain an appreciating rupee, there will be the MSS tool to suck it out.

The secondary market may see some demand from foreign institutional investors for T-bills, which are lucrative short-term instruments.

Government securities
Thin trade likely

The government securities market may remain bearish, as the tightness in liquidity is expected to continue. With the financial year-end approaching, banks will be cautious about investing in gilts, as the yields are already on an upside due to the tight liquidity condition.

Inflation remains another worry, as it has been consistently ruling higher. The RBI has been signalling liquidity-tightening measures to curb money supply, which, in turn, is impacting the sentiment in the market. This is likely to push the yields up for the dated security to be auctioned as part of the MSS - 6.65 per cent 2009 from 7.96 per cent last week to 8 per cent this week.

In this backdrop, the yield in the ten-year benchmark is likely to rule in a wide range of 8.02-8.10 per cent.

Corporate bonds
New offers boost

The corporate bond market will continue to remain lacklustre. The buzz in the primary market will keep continuing with issues from Power Finance Corporation, Exim Bank, Nabard, Canara Bank and State Bank of Indore. While PFC and Exim are paying 9.85-9.90 per cent for 10 years, Canara and State Bank of Indore bonds offer 10-10.25 per cent for 10 years.

The interest rates for certificate of deposits may come down, as most of the banks are through with their fund requirements. Mutual funds, which were offering money to banks to earn higher returns for liquid funds, have already faced redemption for payment of advance taxes. Therefore, the desperate need for funds is expected to be over. The secondary market will be lukewarm, with demand coming in from insurance companies and provident funds.

Recap: The spread between the 10-year government security and triple-A corporate bond of a similar maturity widened to 145 basis points.

Rupee
Higher bias seen

The spot rupee may appreciate, as banks are expected to use dollar resources to generate rupee. This is because the rupee liquidity has tightened, owing to an outflow of around Rs 40,000 crore from the system.

The equity market, after a fall last week, is expecting portfolio inflows, which will be accompanied by corporate dollar proceeds. Companies may rush for realising their proceeds to avoid loss in value due to sharp appreciation of the rupee.

The downside to rupee may arise from the RBI intervention, which may result in buying dollars to stem the currency's appreciation. Meanwhile, as rupee rates firmed up due to tightness in liquidity, it pushed up the rates for booking rupee to be paid for forward dollars. In this backdrop, the spot rupee is expected to rule in the range of 44.05-44.40 to a dollar.

Recap: The spot rupee appreciated to 44.10 at the weekend, as banks increasingly encashed dollars for generating rupee resources to meet fund requirement on the reporting Friday.