Selling by banks to dent gilts

OUTLOOK

The liquidity overhang in the system will continue to remain, despite tax outflows of Rs 7,000-10,000 crore this week.

With an average of Rs 26,968 crore having been mopped up by the daily repo market last week, the market is more than comfortable in terms of liquidity.

However, as there has been no direction given and December generally being a bad month in terms of trading, activity this week continues to look bleak.

Despite some talks of corporates locking in at current interest rates in expectation of some hardening, excess liquidity and continuous presence of RBI sterlisation as foreign reserves cross $97.5 billion, dealers do not see any tightening in rates for the next three to six months.

Interestingly, some market players continue to expect a repo rate cut. However, the current lacklustre environment is not expected to change before January, and yields will remain ranged.

The 10-year paper is expected to hover around 5.22-17 per cent levels, with there being no trigger points.

Some listed public banks are likely to sell some part of their government securities portfolio to show profits from treasury in the third quarter. Their unlisted counterparts are also likely to follow suit.

Most private banks, however, chose to book profits prior to the credit policy announcement as they were not as confident of a 25-50 basis point rate cut.

Interest in the market has waned since the credit policy announcement since the Reserve Bank of India (RBI) has failed to give any indication to the market.

Call seen at sub-repo levels
Overnight call money rates will continue to remain easy on the back of excess liquidity and no government securities auction in the near future.

Tax outflow of about Rs 10,000 crore is not expected to make any impact to the market on the back of continuous inflows following RBI's sterlisation process.

Moreover, with banks and primary dealers sitting on the sideline and mutual funds equally not interested in picking up stocks, there is no demand for funds.

Much of overnight borrowing is taking place at about 4 per cent, and call rates continue to be artificially pegged at repo levels.

Inflows to add to liquidity
The money market will see net inflows of Rs 1,051.2 crore this week on the back of interest coupon payments on central and state borrowings.

This, however, does not take into account tax outflows, which are expected to be in the region of Rs 7,000-10,000 crore.

Gross inflows during the week amount to Rs 1,551.2 crore, with an outflow of Rs 500 crore in terms of 91-day treasury bill auction slated for Wednesday.

T-bills yields at sub-repo levels
There continues to be appetite in the marker for treasury bills, as players are not keen to lock up funds for long-term.

Yields, thus, continue to rule at sub-repo levels, with 3-month T-bill at 4.15-18 per cent levels and 365-day T-bill currently quoting at 4.3 per cent.