Surging oil prices cause for worry

OUTLOOK: Money Markets

Though the inflation rate fell to 7.20 per cent for the week ending October 2, 2004, oil prices are still hovering around $55 per barrel. This remains a big negative trigger for the markets.

Another negative factor has been expectations of a cooling down of economic growth in China, which has led to crash in commodity prices globally. This, in turn, hints at a slowdown in the hike in interest rates.

US 10-year bond yields fell last week, said dealers. This has at least warded off the global pressure on Indian interest rates to rise for the time being.

The government on Friday decided against raising oil prices for some time. It said the matter will be discussed with political allies in the coming fortnight.

This has been a breather for the markets, both on account of its effect on inflation and on interest rates. International oil prices were around $55 a barrel on Friday as traders feared time was running out to top up low heating oil supplies before the winter.

There will be an inflow of around Rs 2943.18 crore this week towards coupon redemption and maturity of government papers.

As per the schedule, outflows will hover around Rs 2,000 crore. While there will be an outflow of Rs 1000 crore towards borrowing through auction of treasury bills by the government, an additional Rs 1000 crore will be sucked out through the market stabilisation bonds.

Liquidity is unlikely to come under pressure in the immediate future, but with credit pick-up in full swing, liquidity may come under pressure in the medium term.

However, to that extent, the effect of the excess liquidity on money supply and inflation would be limited.

Foreign institutional investors are believed to have invested heavily in the National Thermal Power Corporation public issue.

The bullish outlook on the rupee is also likely to attract good portfolio inflows. These are positive triggers for a growth in liquidity in the banking system in the coming months.

Bankers feel that with so much uncertainty on account of inflation, oil prices and interest rates, government security yields should mellow down.

Sentiment is also wary ahead of the central bank's mid-year monetary policy review on October 26.

Overnight rates seen staying stiff

Call rates are expected to remain moderate in the 4.50-60 per cent range going by the fact that the government is mantaining a credit balance in its accounts instead of spending the amount borrowed from the system.

This is creating temporary liquidity mismatches in the system and the outstanding liquidity is receding to Rs 9,000-10,000 crore levels.

This week might see some stiffness in overnight rates. Owing to the reporting week, call rates remained stiff at 4.60-70 per cent levels last week.

Treasury bills

There is one set of auction of the treasury bills proposed for this week. There will be an auction of 91-day treasury bills.

The yields are expected to be market related. Last week, the 91-day was auctioned at a cut off yield of 5.16 per cent.

Though the yields at the T-bill auction this week will be market-bid, market participants feel the RBI always has the option of rejecting the bids if it were to give a signal that the current rates are not comfortable.