Re to weaken; gilts bullish

WEEKLY MONEY & CURRENCIES

Liquidity Likely to be enough

Liquidity is expected to remain adequate till the reporting Friday is over. With the RBI deciding to pay interest on CRR balances, there is a lurking fear that the notified amount in the market stabilisation scheme may be hiked to suck out excess liquidity. However, market dealers say they are not sure if it will sustain for the long term.

Call Rates to ease

Call rates are likely to rule easy since liquidity is comfortable. The RBI's move to pay interest on cash reserve is major reprieve for banks. If there are, however, counter measures to suck out excess liquidity, the rates may go up.

T-bills Moderate cut-off likely

The RBI will issue 91-day and 364-day t-bills for auction to raise a total of Rs 4,000 crore. The cut-offs are likely to moderate further since liquidity has improved. There is demand for t-bills from banks to build up their SLR portfolio since these securities do not attract market valuation.

Gilts Bullish trend seen

Dealers said even if rates on last week's state loans auction were quite wide between 8.10 and 8.45 per cent, the bidding was quite aggressive, which reflects a good appetite for gilts. If the budget, however, announces a larger borrowing for the new fiscal, it may result in a bearish market.

Since the banks are maintaining SLR at 25-27 per cent, they will have to build up the portfolio for valuation purpose during the end of the financial year. Moreover, most banks are raising deposits, which, in turn, will require securities to provide for SLR. Therefore, trading interest may pick up this week and in this backdrop, the benchmark 10-year yield is likely to rule in the range of 7.90-8.00 per cent.

Rupee Decline to continue

The spot rupee may continue to depreciate since the market expects the RBI intervention to continue once the rupee goes beyond 44.15. Since the equity market has undergone a major correction, portfolio inflows are likely this week.

Moreover, corporate proceeds in the form of ADRs/GDRs and external commercial borrowings are likely to continue.

Forward premiums may soften a bit with the improvement in liquidity. But players expect premiums to rise following month-end demand for dollars from corporates. In this backdrop, the spot rupee is expected to rule in the range of 44.15-44.30 to a dollar.