Liquidity: Concern remains Liquidity in the short to medium term remains a concern among market players. "Currently, the liquidity is just about adequate. If there is a major sell-off in the equity market and the dollar demand goes up for foreign banks, there might be a shortage in liquidity, which may require the Reserve Bank of India (RBI) to use its repo window to infuse funds," said a dealer of a public sector bank. |
While there has been no major supply of liquidity in the market, either through forex inflows or the government expenditure, the RBI has been consistently sucking out excess liquidity through treasury bill issuance under the Market Stabilisation Scheme (MSS). |
The trigger for the sell-off next week may be political developments, where coalition partners are yet to take a final stance on the Indo-US nuclear deal. Besides, if the yen appreciates or the global liquidity tightens, increased dollar demand may require funds to sell in the Indian markets. |
On the other hand, following the last week's cues, some dealers feel that if global markets remain stable, foreign institutional investors (FIIs) may re-enter the market at lower levels, thus adding to the liquidity in the market. |
The market may witness an inflow of around Rs 2,546 crore as against an outflow to the tune of Rs 5,500 crore. |
Call: Likely to rise Inter-bank call rates, the interest rate charged by a bank to another for lending funds, is expected to rule in the range of 6.20-6.50 per cent. However, if the dollar demand rises, call rates may then inch up further since rupees will be swapped for dollars. |
The firming up may be seen during the beginning of the week since the market will prepare to participate in the auction of T-bills for an enhanced amount of Rs 5,500 crore as against Rs 4,000 crore usually. |
Treasury bills: Brisk trade ahead The RBI will be auctioning 91-day and 364-day treasury bills for Rs 3,500 crore and Rs 2,000 crore respectively. The cut-off yield on these papers is likely to firm up as the outlook on liquidity is bearish. |
Since the equity market is volatile, both FIIs and Indian banks will be actively buying treasury bills in the secondary market since they are sovereign papers. |
Therefore brisk trading is expected to push the yields down in the secondary market, provided liquidity does not emerge as a major concern. |
G-sec: Inflation push likely The government securities market may continue to witness firmness in yields since liquidity remains a concern. If the sell-off continues in the equity market and banks swap rupees for dollars, liquidity then will be an issue. Banks are even wary of investing for excess SLR requirement since the view is quite uncertain towards the short-term interest rate, says a dealer. |
If there is no pressure on liquidity, the yield on the ten-year benchmark paper may even touch 7.91-7.92 per cent. |
Inflation, however, remains a positive trigger for the market and is, in fact, likely to rule below 3.5 per cent towards the end of August or the beginning of September due to the huge base effect, says a bank dealer. |
In this backdrop, the yield on the ten-year paper is expected to rule in the range of 7.92-7.98 per cent. |
Corporate bonds: New issues afoot The long-term corporate debt market may witness primary issues from public sector undertakings such as Rural Electrification Corporation, Indian Railways Finance Corporation (IRFC) and financial institution Nabard. |
According to dealers, REC and Nabard propose to raise Rs 1,000 crore each, while IRFC is planning a bond issue for Rs 300-400 crore. |
Dealers point out that interest rates, both in the long- and short-term ends of the maturity, have gone up, albeit a steeper rise in the short term. As a result, the yield curve is flat since one-year funds are available for around 8.75-9 per cent and 5-7-year funds at 9.75 per cent. |
Rupee: May decline The spot rupee movement to the dollar is expected to remain volatile, mainly driven by political developments in India. Any signs of instability may create jitters for the Indian equity market, leading to a sell-off by foreign funds, mainly among portfolio investors. This, in turn, may depreciate the rupee since the dollar demand will go up. |
Another major trigger will be the global markets. If the markets continue to fall following subprime woes overseas and liquidity crunch persists, the rupee may depreciate. This will be primarily due to the dollar demand from foreign institutional investors on behalf of their custodian banks. |
Similarly, on the currency front, the yen appreciation following any announcements from the Bank of Japan may move the global markets through unwinding of trades denominated in the yen into the dollar. This may also impact the Indian markets since such positions will be liquidated to generated dollars. |
However, if the rupee depreciates, exporters may sell dollars, which may perk up the rupee a bit. |
The annualised premium on the forward dollars may continue to remain rangebound with moderate rupee liquidity in the market. However, if the rupee liquidity gets affected either through the increased dollar demand or liquidity tightening measures by the RBI to control excess liquidity, the premium may inch up. |
The spot rupee, in this backdrop, is expected to rule in the range of 40.90-41.50 to a dollar. |