Govt fund to up liquidity; Re to rise
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| LIQUIDITY Low reverse repo bids a concern |
| The liquidity position is expected to improve this week with the government expenditure picking up. While the market has been on a bullish mode, the decline in the reverse repo bids remain a concern. |
| The reverse repo bids fell to a low of Rs 3,000 crore during the beginning of the last week following the outflows towards advance taxes but improved to almost Rs 14,000 crore during the weekend. |
| However, the market is of the view that the government expenditure is yet to start and the incremental growth in liquidity has been mostly due to the foreign exchange inflows to the Indian equity market. Therefore, the market is keenly awaiting the liquidity status this week. |
| The borrowing calendar for the second half of the current financial year is likely to be announced next week. While total borrowings are expected to be to the tune of around Rs 60,000 crore, liquidity will not be an issue if the FII inflows are accompanied by the government expenditure. |
| This week will witness an inflow of around Rs 1,019 crore as against an outflow of Rs 4,000 crore. |
| MONEY MARKET Calls seen tight |
| Interbank call rates are likely to remain firm till liquidity is comfortable. Dealers said the reverse repo bids should at least be in the range of Rs 20,000-25,000 crore for the market to draw comfort. Reverse repo is the mechanism through which the RBI absorbs excess liquidity from the financial system. |
| However, the picture is a bit different if the arbitrage angle is studied between the call money market, CLBO and reverse repo. Rather than putting the excess funds in reverse repo at 6 per cent, banks are lending it in the call market at around 6.50-6.75 per cent. |
| More interestingly, a bank can borrow funds to the tune of government securities from the CLBO market at 6.10-6.15 per cent and lend the money in the call money market at 6.50-6.75 per cent, thus earning an interest margin of 40-50 basis points. Some of the banks which maintain a thin SLR and thus do not have surplus government securities may need to borrow funds from the call market even at higher rates. |
| One basis point is one-hundredth of a percentage and SLR is statutory liquidity requirement to be maintained by banks in the form of government securities. |
| TREASURY BILLS Cut-off yields to firm up |
| Even as there is brisk trading in the treasury bill markets, the tightness in the call rates and concern in the short-term liquidity may impact the cut-off yield in the auction of the treasury bills this week. |
| As seen last week, the cut-off yield on the 91-day t-bill shot up to 6.52 per cent, four basis points higher than 6.48 per cent last week. If the liquidity situation continues to remain tight, the cut-off yields may firm up further. |
| There are two treasury bills to be auctioned this week - 91-day and 364-day t-bill each for Rs 2,000 crore each. The amount forms part of the government borrowing programme as well as the market stabilisation scheme. |
| Recap: Due to base effect, inflation for the week ended September 2 fell below five per cent to 4.78 per cent as against 5.01 per cent for the week ended August 26. The inflation has mellowed despite seven per cent rise in prices of fruits and vegetables. |
| GILT US rate move boost |
| The market is in a bullish mode perceiving a rate softening trend globally. The slowdown in the US economy has especially buoyed the market which is witnessing buying demand from banks across the board. It is also likely that the oil prices may rule below $61 per barrel, said a dealer. |
| The market is also expecting that the Federal Reserve may resort to cut in the base Fed rates in the open market committee meetings, going forward. |
| The borrowing calendar for the next half of the financial year will be as per the target even as the government considers accounting for the bank recapitalisation bonds, oil bonds and FCI bonds in this calender. |
| All these have painted a positive sentiment for the market. |
| However, if the liquidity still remains a concern, it may act as a negative. The market will also keenly watch the regulator's statement on inflation since it has already voiced inflation concerns. The market, albeit, may witness profit taking by banks in the middle of the week so as to help them book profit for the quarter ended September 30. |
| In this backdrop, the ten-year yield is likely to rule in the range if 7.58-7.68 per cent. |
| Recap: The market rallied last week, after the US maintained status quo in its base Fed rate by not restricting to any revision. The yield on the ten-year 7.59 per cent 2016 benchmark paper fell to a low of 7.62 per cent and banks were seen on a rampant gilt buying spree. |
| CORPORATE BONDS New floats likely |
| UTI Bank is set to tap the market with a perpetual bonds offering 10.05 per cent semi-annually for raising Rs 214 crore. |
| Various public sector undertakings such as Indian Railway finance corporation ( IRFC) and Power Finance Corporation (PFC) are expected to venture into the market shortly. They will be accompanied by Central Bank of India and Allahabad Bank which are likely to raise subordinate. |
| The secondary market will continue to draw investment interest from banks and insurance companies. Both the oil companies - Bharat Petroleum and Hindustan Petroleum - have started offloading their kitty of oil bonds to raise funds, said dealers. |
| These companies were finding it difficult to sell the bonds following a restricted market appetite. However, with falling yields, investment in these bonds are now offering good yield differential in the investment. |
| Mutual funds are also seen investing in the commercial papers and certificate of deposits to deploy the inflows to their liquid scheme. They are mostly targeting the one to three year papers. |
| Recap: The spread between the 10-year government security and triple-A bond of corresponding maturity has widened to 100 basis points with rapid fall in the yields of government securities. |
| RUPEE $ weakness to fuel rupee rise |
| The spot rupee is likely to appreciate this week albeit with pause. The appreciation will be occasionally interrupted by dollar buying by the oil companies. |
| General weakness of the dollar to yen and low crude prices are likely to fuel portfolio investments into the domestic equity market. |
| On cross currency movements, the spot rupee is also likely to gain against the dollar. The greenback has taken a beating against all major currencies following the slowdown in the US economy which has also led the Federal Reserve to maintain status quo in its Fed rate. |
| Crude prices, on the other hand, remain as a positive trigger as much negative. |
| The premiums on forward dollars will be primarily guided by interest rate outlook in the domestic market. At present, yields on government securities are falling in line with the US yields. This narrowing down of the interest rate differential will lead to softening of the premiums. |
| In this backdrop, the spot rupee may move in the 45.80- 46.20 range to a dollar. |
| Recap: Dollar weakness, FII inflows and low crude prices led to spot rupee falling below 46 levels and rule in the range of 45.88-92 to a dollar. |
| The spot rupee could have further appreciated but for the dollar demand from oil companies which are scurrying so as not to miss the opportunity. |