Rupee to appreciate

LIQUIDITY
RBI intervention to continue

The Reserve Bank of India is expected to continue intervening in the market. It has been buying dollars from the market and in the process supplying rupee funds. There has not been much expenditure by the government, however.

Foreign exchange inflows have been robust tracking the buoyant domestic equity markets. Even though the market players expect a slight correction, the inflows are expected to continue. Incidentally, dollar inflows have been the only source of liquidity.

Besides foreign institutional investors (FIIs) investing in the Indian equity market, corporates and exporters are also bringing in their dollar proceeds into the country. The rupee is appreciating fast and these corporates would not like to lose much of the value of these proceeds, said a dealer.

This week will witness an inflow of around Rs 3,108 crore as against an outflow of Rs 5,930 crore. The outflow includes auction of treasury bills for government borrowing and market stabilisation.

MONEY MARKETS
Calls to stay firm

Liquidity along with demand is likely to improve this week. The new reporting fortnight starts this week and banks will be seen setting aside funds for the reserve requirement.

Since the market is witnessing a fine calibration of liquidity by the RBI through infusion as well as absorption, the players have also become cautious in their own funds management.

Now, the RBI is supplying liquidity through buying dollars and absorbing the same through auction of government securities unlike earlier when it used to absorb liquidity only.

The tightness in the liquidity has also made borrowing from other avenues bit expensive.

Call rates have shot up and also the repo window of the RBI that helps in providing liquidity with gilts as collateral. This route, however, is only available to those banks with surplus stock of government securities.

Therefore the fund management by the banks will be significant for the movement of call money rates.

TREASURY BILLS
Cut-off yield to firm up

The market will witness the auction of 91-day and 182-day treasury bills for a notified amount of Rs 3,500 crore, including Rs 2,500 crore towards market stabilisation scheme.

According to market players, the liquidity has been under strain and funds are required for the government's borrowing programme as well.

Therefore, it is likely that the cut-off yield on the t-bills may firm up signalling the tightness in the liquidity in the short term.

In previous occasions, the tightness in liquidity has already resulted in inching up of the cut-off yield on the treasury bills.

However, the secondary market will continue to witness the demand for treasury bills from banks since they want to maintain securities to borrow funds.

However, the exclusive demand from the banks for shot term papers may not continue as there is need to expand the maturity of the investments for avoiding asset liability mismatches.

Recap: Inflation rate for the week ended October 28 figured at 5.09 per cent as against 5.41 per cent the previous week.

Inflation has been ruling high consecutively for the last five weeks on account of rise in prices of essential commodities.

GOVERNMENT SECURITIES
Bullish run likely

The market will remain bullish. Inflation has been moderate with drop in prices of essential commodities.

Last weeks' demand for government securities from private and foreign banks is likely to continue. While some market players interpret it as portfolio building for trading purposes, others are of the view that these banks may be piling up the stocks for their custodian customers.

The custodian clients "� the foreign institutional investors "� will soon get a new cap for their debt market investments after the capital account convertibility report specified fresh limits.

The RBI will be soon issuing these guidelines. As per the new norms, the FIIs could get limits for investment in government securities linked to total issuance of central government securities.

Therefore, on behalf of the FII clients, these banks may be buying securities, said a dealer. On the other hand, the liquidity is likely to improve further with RBI's intervention.

This might fuel some demand but most of the liquidity may get absorbed through the state government's auction where a total of 11 state governments will suck out Rs 2,430 crore.

However, if crude prices continue to go up, it might impact the market negatively. Another trigger will be the effect of data to be released in the US on retail sales, industrial production and consumer price index on US treasury bonds.

The yield on the ten-year benchmark is likely to move in the 7.56-7.66 per cent band.

Recap: A series of positive triggers moved the market up which started with the statements of the finance minister to contain inflation through fiscal measures.

This helped the market as the signal was seen understating the need for monetary measures towards this effect. Secondly, the yields on the US treasury bonds fell following data and thirdly the finance ministry announced a whopping collection of indirect taxes as part of its revenue.

However, on its own, there was very little incentive for the market to perform since liquidity remained a constant worry.

CORPORATE BONDS
Banks to turn active

Banks are in the market to raise funds, both short term and long term. UTI Bank and State Bank of Mysore are raising funds through upper tier-II bonds.

At the same time, IDBI bank, Karnataka Bank and HDFC Bank may be seen active in mobilising funds through certificate of deposits.

The secondary market, however, is facing a problem of supply surge with no reciprocal demand for these papers. Except for oil and food bonds (FCI), there is hardly any appetite for other papers.

Besides being quasi sovereign in nature, these papers are offering a good spread of 55-60 basis points over the corresponding benchmark government security.

Some of the public sector undertakings which are likely to visit the bond market for resource mobilisation are Power grid corporation, Power Finance Corporation and Rural Electrification Corporation, said a bond dealer.

The only savvy investors in these markets have been provident funds and insurance companies who buy for long term investment and hold these papers till maturity.

Recap: The spread between the 10-year government security and triple-A bond of the corresponding maturity has further widened to 110 basis points.

This follows a rapid fall in gilt yields in the long term due to brisk but lacklustre trading of corporate bonds in the secondary market. There is not much trading interest for the perpetual bonds issued by most of the banks.