RBI to keep Re on leash; liquidity set to ease

Liquidity: To ease

Liquidity will remain moderately tight during the beginning of the week. The outlook towards the equity market is positive. Foreign inflows will continue. Exporters and companies borrowing funds through the external commercial route will also bring in funds whenever there is a depreciation in the rupee. However, the RBI is expected to intervene on a large scale and absorb the dollars. The market will also have to wait for government expenditure to bring the advance tax money back into the system.

The market will see an inflow of only Rs 1,024 crore this week as against an outflow of Rs 16,500 crore.

Call rates: Headed upwards

Call rates may inch up in the beginning of the week till the outflows in the form of advance taxes do not come back into the system through government expenditure. This is because even if the RBI were intervening in the foreign exchange market to suck out excess dollars, there are bonds worth Rs 15,000 crore that were issued by the RBI to absorb the resulting rupee liquidity. The market players will also prepare for the reporting Friday when banks have to set aside funds with the RBI in proportion to the deposits mobilised, under CRR requirements.

Treasury bills: Situation of plenty

The RBI will auction 91 day and 364 day treasury bills for the notified amount of Rs 3,500 crore (Rs 3,000 crore for MSS) and Rs 3,000 crore (Rs 2,000 crore for MSS). The cut off yield on the t-bills is expected to come down this week following brisk trading interest from banks and institutions on the back of improved liquidity in the market.

Corporate bonds: Reducing yields

The improvement of liquidity situation and brisk trading in the government securities is likely to bring down the yields in corporate bond market. Banks will continue to raise funds through the certificate of deposits. Some inflows into the equity market may find their way into mutual funds. The MFs in turn may park funds into corporate bonds, especially in the shorter term.

G-sec: Rallying ahead

The government securities may witness a rally this week because of the liquidity situation. The advance tax outflows will come back into the system. The equity market is expecting inflows and dollars will be sold by companies and exporters alike. The RBI is also likely to sterilise the inflows through stabilisation bonds. The central bank has already announced the auction of dated securities worth Rs 10,000 crore.

Rupee: Likely to be reigned in

The spot rupee is expected to depreciate to 40 a dollar this week. RBI's intervention will be crucial to stem the rupee appreciation. The rupee is overvalued by 16 per cent on the real effective exchange rate (REER), which is an index based on a combination of currencies. The rupee usually hovers in a range of (+/-) 5 per cent around the REER, going by rough estimates.

The forward premia will be finely balanced between selling of dollars by exporters and companies and purchase of forward dollars from the importers. Some dealers are of the view that the rupee premium to be paid for booking dollars will come down since exporters will sell dollars frantically. "" Anindita dey

On the other hand, the importers will prefer to wait in anticipation of a rupee rise.

In this backdrop, the spot rupee is expected to rule in the range of 39.70-40.20 a dollar.