Rupee bearish; liquidity seen flush

Liquidity is likely to ease by December as government starts spending; The benchmark 10-year paper is expected to witness some trades this week with the yield moving in the 7.07-7.15 per cent range; Rupee will fluctuate in the 45.75-45.85 band against the greenback; Call rates are expected to head south.

LIQUIDITY
Auction cancellation to aid sentiment

Liquidity is expected to ease this week backed by the cancellation of a few auctions under the market stabilisation scheme (MSS) and rescheduling of government borrowing programme.

The finance minister has indicated that the government would go ahead with its scheduled borrowing programme. But dealers say even as the government continues with its broad-based borrowing programme, there would be some rescheduling of auctions so that the market recovers from the existing cash crunch.

Even if the government goes ahead with its borrowing schedule, its impact on liquidity would be marginal as a large state-owned insurer is expected to buy most of the government paper.

As per its October-March borrowing calendar, the government is scheduled to raise Rs 5,000 crore between November 16 and 24 through bonds with maturities of 15 to 19 years.

Typically, life insurance companies such as the Life Insurance Corporation of India LIC have appetite for such long tenure papers. The Reserve Bank of India (RBI) has cancelled the auction of treasury bills under the MSS for the third consecutive week "taking into account all relevant factors."

It has decided that the auction of 364-day treasury bills for Rs 1,000 crore scheduled for November 23, 2005 under quarterly indicative schedule for MSS will not be conducted.

RBI, however, will conduct the regular auction of 364-day treasury bills worth Rs 1,000 crore. On Friday, the market had witnessed an inflow of Rs 4,000 crore from the redemption of treasury bills and interest payments.

This helped boost cash surpluses in the system, which had shrunk to Rs 600 crore, from more than Rs 20,000 crore at the end of October.

Easing liquidity to keep call soft

Call rates are expected to come off this week, taking cues from easing liquidity conditions.

Call rates are expected to hover around 6 per cent on Monday. Typically call rates inch up to 6 per cent during festive season when banks spend huge sums towards staff bonuses among others. It is a systemic adjustment and the rates ease by December when funds come back into the system as and when the government starts spending.

Call rates trade around the reverse repo rate when there is adequate liquidity in the market. The overnight rate eased to 6.0-6.1 per cent on Friday, from Monday's close of 6.30-6.40 per cent, indicating an improvement in banks' cash surpluses that had shrunk in this month owing to outflows towards federal bond auction and increased lending by banks in the festive season last month.

The annual rate of inflation on a point-to-point basis slipped to 4.14 per cent for the week ended November 5 from 4.75 per cent in the previous week. The rate of inflation during the same period last year was 7.93 per cent.

GOVERNMENT SECURITIES
Recovery on cards

The government securities market is expected to marginally recover this week following an improvement in liquidity, soft oil prices and lower-than-expected inflation data. Traders expect some activity in the currently illiquid ten-year paper.

The yield on the benchmark paper would trade in a range of 7.05 per cent to 7.15 per cent. The yield on 2014 government bond having a coupon rate of 7.37 per cent was expected to trade in the band of 6.90/7.00 per cent this week. The domestic inflation rate has softened, which will aid government bonds to post modest recoveries this week, said a dealer.

Recap: Government bonds gave up marginal gains to end weak on Friday after the finance minister said the government would go ahead with its scheduled borrowing. Traders expected the proposed auction of Rs 5,000 crore due between November 6 and 24 to be cancelled or delayed due to a tight cash situation in the money market.

The yield on the popular 7.37 per cent 2014 government bond ended the week at 6.9703 per cent against Monday's close of 6.97 per cent.

"Finance minister said earlier banks would be able to maintain the current level of interest rates until the end of the business year in March 2006, and that the system had ample liquidity. But the borrowing comment that immediately followed pulled prices lower," said a dealer.

CORPORATE BONDS
Thin trades to persist

Corporate bonds market will continue to be inactive this week. Corporates are refraining from raising resources through bonds because of hardening of yields. Tight liquidity has put pressure on corporate bonds' yields, which has led to some thin trades in the market.

There are other economical options for corporates to raise resources, said a chief dealer with a private bank. Both primary and secondary markets are not likely to witness active trades. A debt market expert said there was a greater possibility that yields would rise, which indicates that the market would remain inactive in the coming weeks.

Recap: The corporate bond market has been lacklustre with most corporates staying on the sidelines. The spread between a 10 year corporate bond and a similar maturity government bond was 25 basis points last week and between a five year corporate bond and a 5-year government bond it was 45 basis points.

CURRENCY MARKETS
Bearish undertone likely

The rupee is expected to be steady with a bearish undertone this week. Dealers say the rupee would trade in a band of Rs 45.75-Rs 45.85 in the reporting week.

Dollar has been gaining strength in the overseas market amid significant narrowing of interest rate differential between the US and India. Even foreign fund inflows have been apathetic this month after outflows in October.

Foreign funds have bought about $400 million of stocks this month, after pulling out more than $800 million in October, causing some concern to analysts about the rupee's outlook.

The concerns about a rapidly widening trade deficit and trade-weighted overvaluation has dogged the rupee's outlook. In the forward segment, the premiums would continue to be rangebound.

The benchmark six-month annualised premium would hover around 0.60 per cent and the 12-month annualised premium would be around 0.50 per cent.

Recap: The rupee ended a tad weaker at 45.77/78 per dollar on Friday against the Monday's close of 45.73/74, tracking a strong dollar versus other global currencies. The dollar continued its bull run throughout the week in the European market.

The dollar cleared a two-year high against the pound, yen and the euro. RBI last Thursday raised the interest rate cap on non-resident external (NRE) rupee deposits to 75 basis points over Libor or dollar swap rates from 50 basis points, which helped rupee post some modest recovery on Friday.

In the forward market, while the 6-month annualised premium payable in April closed at 0.53 per cent, the 12-month annualised premium payable in October ended at 0.46 per cent on Friday.