RBI to step in, provide liquidity

Liquidity Cost of funds to rise

Liquidity may be in short supply and banks will have to spend more in raising funds. Evidently, the three-month CD rates have gone up to 10.10 per cent, said a dealer.

The RBI's intervention may generate liquidity, but in lesser volumes. The RBI may allow a bit of appreciation of the rupee. This is because absorbing excess liquidity through the market stabilisation scheme (MSS) is an expensive proposition. Moreover, there is no point in infusing liquidity after raising CRR, dealers said.

"The RBI would rather infuse funds through the repo route, if the situation so demands," said a dealer.

Call money Moderate run seen

Interbank call rates are likely to rule moderately tight since the impact of the first tranche of the hike in cash reserve ratio will come into effect this week. Moreover, banks will have to start building positions for the new reporting fortnight starting this week. Even though the RBI may intervene, there will be counter-measures to suck out the excess liquidity.

Treasury bills Cut-off yield to dip

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 on the t-bills is likely to moderate from the highs seen last week since there is robust demand for the t-bills for building reserve requirements and to create portfolio since it does not attract market valuation.

Recap: The call rates inched up to 8.25 per cent and cut-off yield on the 91-day t-bill worked out to 8.10 per cent post-CRR hike by the RBI, reflecting market apprehension of tight money situation in the short term.

Government securities Bullish trend likely

The sentiment in the government securities market may turn bullish since players have discounted any other monetary measures to counter inflation for the time being. The trigger has been the fuel price cut by the government.

Moreover, there are no major outflows slated for this week except the state government auction. Since most of the banks are just maintaining an SLR of 25-27 per cent, there may be demand for gilts. This is because they would be raising more deposits to meet the fund requirement. This is because, part of the funds have been used for aiding the CRR hike .

Therefore, the trading interest may pick up this week and in this backdrop, yield on the ten-year benchmark yield is likely to rule in the 7.90-8.00 per cent band.

Recap: Last week witnessed an inverted yield curve since the cut-off yield on 91-day t-bill was at 8.10 per cent and 10-year gilt at 8.08 per cent. This reflected acute demand for short-term funds compared with medium-term, post-CRR hike.

Corporate bonds CD floats may rise

The corporate bond market is likely to witness a spurt in certificate of deposits floated by banks to raise funds as part of bulk deposits. Dealers feel that the rate for raising money for three to six months will rule in the range of 10.05-10.25 per cent.

However, long-term borrowers may prefer raising funds from overseas or keep the plans on hold for a while since the interest rate scenario is yet to stabilise and budget is round the corner.

Recap: The spread between the 10-year government security and triple-A corporate bond of similar maturity is expected to be 120 basis points. The State Bank of Patiala and UCO Bank are learnt to have raised funds through 3-month CD at 10.10-10.15 per cent.

Rupee Likely to gain

The spot rupee is likely to rule with an appreciating bias since the market expects robust foreign exchange inflows. The inflows will be a mix of portfolio investments and corporate proceeds -- mainly ADRs/GDRs -- and capital raised through the Alternative Investment Market of the London Stock Exchange.

However, the RBI is expected to check the appreciation of the local currency beyond 44 by buying dollars.

The forward premiums, on the other hand, may soften a bit since the expectation of another interest rate hike has died down after the fuel price cut by the government.

Dollar demand from oil companies may put pressure on the forward premiums.In this backdrop, the spot rupee is expected to rule in the 43.90-44.25 range against the dollar.

Recap: The spot rupee appreciated to 44.02-44.03 during the week and forward premiums remained firm.