The story of copious foreign exchange inflows through portfolio investments will continue this week too.
The liquidity scenario remains unchanged and the only exception is that there are no scheduled auctions to subdue the market this week. That the market is flush with funds is evident from the level of daily subscriptions to the repo. Incremental inflows and outflows have had little consequence of late.
This week is quite comfortable where liquidity is concerned. There are inflows of around Rs 4,903 crore as against an outflow of Rs 1,500 crore.
And another Rs 3,500 crore makes its way to the banking system through interest saved on the maintenance of cash reserve ratio (which was cut earlier).
The maturity of 91-day and 364-day treasury bills and gilt coupon redemptions would amount to an inflow of Rs 1,403 crore this week.And there is an outflow of Rs 1,500 crore on account of 91-day and 364-day treasury bills maturing.
Although reporting Friday features this week, the effect of it has already been discounted by covering up which occurred in the initial part of last week.
The interest rate outlook remains soft with global rate cuts and the expectation of a slash in the repo rate (which is unlikely in the near future, though).
Looking at the fundamentals, the inflation rate has been coming down and monsoon has been above average till date and is expected to continue with the same vigour.
Since clear indications of global recovery are yet to surface, rates across the globe are on a decline.
Therefore, the expectation of a repo rate cut continues to be the only trigger even though it has lost much of its relevance by now through continuous reiteration from the regulator that the time is not ripe for such a move.
Liquidity last week was overwhelming as can be seen from the repo subscriptions which ranged between Rs 25,000 and Rs 30,000 crore.
Apart from the usual domestic inflows, the main channel of funds has been foreign institutional investors. This is because the interest rate differential between India and the developed countries offers huge scope for arbitrage.
Call seen ruling in an easy band
The inter-bank call rates are expected to rule easy through this week barring intra-day spikes if stray demand arises to cover for reporting Friday. Last week call rates hovered below the repo rate of 5 per cent.
In fact, with the surfeit of cash in the banking system, repo subscriptions far exceeded the daily average call money borrowings and lendings, leaving very little scope for the manouevering of call rates. Liquidity support availed of from the RBI has declined to a minuscule Rs 1.5-Rs 1.8 crore.
Treasury bills
There are two treasury bills slated to be auctioned this week on July 9. While a 91-day bill will be auctioned for Rs 500 crore, the notified amount for another 364-day paper is at Rs 1,000 crore.
While the interest rates in the longer tenor seems to be stabilising, in the short term, it is going up.
The market yields on 91-day treasury bills, which was ruling around 4.98 per cent the week before last, went up to 5.03-.04 per cent last week. This has also widened the spread between the one year and 10-year yields to around 86 basis points as against 70-72 basis points a few weeks back.
Therefore, if the cut-off set is above 5 per cent for treasury bills, it works out to be one of the most lucrative instruments in the short tenor.
In fact, it has already emerged as one of the instruments heavily favoured by the FIIs who are parking the rupee funds to earn clean returns on account of the interest rate arbitrage available.
