Surplus funds scenario continues

OUTLOOK/ Money markets

Liquidity continues to be in surplus as is evident from the repo window outstandings of around Rs 53,000 crore.

But yes, this figure was around Rs 65,000 crore some time back.

Repo bids have been rising as banks are cutting down on their gilt investments either by reducing the holding duration to avoid market risk or by straight away selling these papers.

This is evidenced by the rise in the cash-deposit ratio, which has gone up from 5.01 per cent to 5.38 per cent in the fortnight ended July 23, while the investment- deposit ratio has fallen from 46.60 per cent to 46.40 per cent.

As against the daily average bids of Rs 13,000-15,000 crore, the repo bids today draw Rs 6,000-7,000 crore.

However, one thing is crystal clear "" incremental liquidity generated through foreign exchange inflows has certainly tapered, said a bank dealer.

For the government, the ways & means advances (WMA) facility has been the source of liquidity to meet its expenditure for some time now.

For the week ended July 30, WMA drawals were marginal at Rs 12 crore.

Meantime, there are two auctions of government paper this week "" a floater issue of 11-year paper for Rs 6,000 crore and a 30-year stock for Rs 2,000 crore "" on August 9.

This will provide the Centre with some liquidity.

Inflation impact foreseen

According to bond dealers, rising inflation is likely to have an upward impact on interest rates.

Moreover, credit growth seems to have hit the growth path, which also signals the possibility of rise in interest rates.

The banking system will see an outflow of Rs 10,000 crore this week because of the above-mentioned auction on August 9.

This will be offset to the extent of Rs 2,012 crore by inflows from coupon redemptions and maturing treasury bills.

Participants sitting on cash

Banks, mutual funds and primary dealers are sitting on their money as they are apprehensive of investing it in government securities. Continuously rising yields means any investment in gilts will lead to losses in the portfolio.

As a consequence, funds will be diverted to the call market, keeping the rates their comfortable the range of 4.25-4.30 per cent.

In the medium term, demand for credit is likely to go up sharply with current thrust of the Reserve Bank of India on rural credit.

This could put come pressure on the call rates and overall liquidity. Last week, repo subscriptions were in the range of Rs 7,000-8,000 crore.

Treasury bills

There is an auction of treasury bills this week. One will be of the 91-day paper for Rs 500 crore towards the regular government borrowing programme, while another for Rs 1,500 crore will be a part of the market stabilisation scheme.

Market participants are of the view that the cut off rates on these papers will be in line with market rates and expectations.

The uncertain outlook on interest rates has made treasury bills one of the most favoured papers because the investment period is small and interest rate volatility does not affect the investor's portfolio.