Govt spending may ease liquidity
WEEKLY MONEY & CURRENCIES
| The government expenditure has been evident through the declining balance in deposits of the central government with the Reserve Bank of India (RBI). |
| Foreign exchange inflows are likely to be highly moderated since portfolio investors in the foreign exchange market are busy booking profits for the calendar year-end. |
| Nevertheless, the equity market is set to witness inflows following a likely 25-50 basis points ( bps) cut in the US Fed rate next week. While RBI could absorb these dollars, the consequent infusion of rupee funds may add to the existing liquidity. |
| Call rates: May dip Call rates are expected to come down from the highs of 7-8 per cent, but will remain higher at 6.25-6.5 per cent. The rates may firm up towards the end of the week when the market will prepare for the advance tax outflows to the tune of around Rs 30,000 crore and the government securities auction of Rs 7,000 crore. |
| In the collateralised lending and borrowing (CLBO) market, mutual funds will not be aggressive in lending since they fear redemption from foreign funds towards the end of the calendar year. Therefore, interest rates may remain in the range of 6.5-6.65 per cent in the CLBO market as well. |
| Treasury bills: Auctions afoot RBI will auction the 91- and 182-day treasury bills for a notified amount of Rs 500 crore each. The central bank has postponed the auction of T-bills towards the Market Stabilisation Scheme (MSS) since there are huge outflows slated for this week from the system. |
| Dealers say this can help ease interest rates in the shorter end of the maturity curve. The rates in the short term have gone up substantially following tightness in liquidity. |
| Corporate bonds: Banks' issues ahead Banks are getting ready to raise funds for meeting the additional requirement towards the Basel-II norms. |
| According to a dealer, the interest rate in the long-term government securities has moderated following a demand from banks. |
| Banks' investment in government securities has substantially gone up in the absence of credit offtake and this has also helped ease rates of corporate bonds. The government securities act as underlying for corporate bonds. |
| G-sec: Rally seen The market feels the liquidity situation may improve this week and this will trigger a rally in the government securities (G-sec) market, at least in the longer end of the maturity. The credit offtake is low and banks will have to deploy deposits mobilised in the beginning of the financial year in investments, primarily in government securities. |
| There are no issuance of treasury bills under MSS and it is a positive trigger for the market. |
| Rupee: Likely to rise The spot rupee is expected to rule with a bias towards appreciation since global markets are abuzz with the likelihood of a rate cut by the US Federal Reserve, set to meet next week. |
| According to a dealer, while markets have already discounted a 25 bps cut in the Fed rate, a 50 bps cut is not ruled out either. If this happens, the dealer says, the rupee will appreciate in line with other currencies against the dollar. |
| Another trigger for the dollar will be the non-farm payroll data. While the market is expecting low job claims, an internal report of the Asian Development Bank has suggested a rise in job claims, according to a forex consultant. The rupee-dollar rate is expected to rule in the range of 39.30-39.80 to a dollar. |
| Post-script RBI sold dollars to ease tightness and stopped the rupee infusion into the market through the repo route. |