Bond redemption funds likely to ease liquidity

MONEY MARKET ROUND-UP

Liquidity: Good flow
Liquidity is expected to ease this week as funds from the redemption of bonds flowing into the market are likely to exceed the ouflow from the forthcoming auction.

For the week ended August 22, the market was severely short of funds, resulting in the Reserve Bank of India (RBI) injecting an average of Rs 26,100 crore into the system.

The bond redemption may bring in Rs 5,700 crore into the market, while the outgo from the auction is expected to be around Rs 4,000 crore for the week ending August 29.

The liquidity position may get tough, if RBI intervenes following a further rupee depreciation. If the rupee is seen approaching the 44 mark to a dollar, the central bank may step in to supply dollars (and also suck out rupees) and arrest the further weakening of the rupee.

G-sec: Upward bias
The yield on the 10-year government securities (G-sec) fell by 8 basis points and was 9.06 per cent at the end of the last trading week.

According to Rupa Rege Nitsure, the chief economist at Bank of Baroda, the government bond market is technically oversold. So the current levels look good for buyers to pick up securities. However, there could be a dampening effect of liquidity to some extent.

Easing of crude oil prices and an oversold position in the G-sec market have created an upward bias in the bond market. The yield on the most traded 10-year benchmark paper is seen in the band of 9 to 9.10 per cent next week.

Rupee: In a range
Helped by foreign investment inflows and stock market gains, the rupee appreciated in the last two days of the week gone by. The rupee ended at 43.43 to the greenback on Friday from the previous day’s close of 43.52.

Dollar demand from oil firms and other importers has been capping the rupee’s steep rise. Forex dealers expect the rupee to remain in a range of 43.30 to 43.50 against the dollar next week.

Any sharp weakening of the rupee towards 44 may prompt the RBI action to stem the depreciation.