Surplus liquidity prevails

OUTLOOK: Money markets

Liquidity continues to be abundant in the banking system. Testimonies to this are the outstanding repo amount of Rs 80,000 crore and the rise in the average daily repo bid amount from Rs 2,000 crore to Rs 20,000 crore in a week due to the introduction of one-day repo.

Therefore, there are chances of the government deciding to raise the amount under the market stabilisation scheme to suck out the excess liquidity.

The Reserve Bank of India has been intervening in the foreign exchange markets to reduce the impact of rising liquidity on inflation and to curb the dollar outflows in the form of oil payments.

There will be an inflow of Rs 1,087 crore and an outflow of Rs 3,186 crore towards treasury bill auctions and state government loans this week. For the week ended August 13, there were on ways and means advances.

Inflation rate, meanwhile, has risen to 7.96 per cent for the week ended August 7 after incorporating the oil price impact. According to bond dealers, this rising inflation is putting upward pressure on interest rates. They, however, added that the rise in the headline inflation may slow down due to base period effect.

Call money rates to stay low

Call money rates will remain comfortable in the range of 4.25-4.30 per cent. Banks, mutual funds and primary dealers are not investing in government securities due to rising yields. Particularly, banks fear that a further rise in yields may force them to tap the investment fluctuation reserve.

Moreover, there are no other short-term instruments available for these entities to park the surplus funds.

In the medium term, however, the overnight rates may go up as demand for credit is likely to pick up sharply due to the current impetus of the central bank on rural credit.

Two t-bill auctions for Rs 2,000 cr

There are two 91-day treasury-bill auctions this week. The notional amounts of these auctions will be Rs 2,000 crore "" Rs 500 crore under government borrowing programme and Rs 1,500 crore under market stabilisation scheme.

Last week, the cut-off yield on the 364 day t-bill set at 5.4 per cent was uncomfortable to the players as the prevailing yield on the one-year paper was 5 per cent. Moreover, the central bank announced a yield of 5.53 per cent for the one-year gilt "" 6.18 per cent 2005.

Uncertain outlook on the interest rate scenario has made treasury bills market as one of the most favoured avenue for money-market investors to reduce duration of their portfolios, thus reducing the impact of volatility in government securities.

Gilts seen ranged

Government security prices are expected to be rangebound this week.

Market players feel that movements in gilts and other bonds this week will not be impacted much with the inflation data as the rise is already factored in.

This is because last week's inflation data excluded the contribution of the oil price hike.

G Narayanan, general manager, treasury, Bank of India, said, "The bond market has expected the inflation at 7.96 per cent. Nevertheless, this is the peak and from here the figure should start moderating."

He added, "The market will remain flat this week. The yield on the 10-year gilt should start moderating to 6 per cent over a period of time in line with the inflation rate which is expected to soften due to the base-year effect."