Govt, year-end needs key to liquidity
| While liquidity remains the most crucial factor this week, the government expenditure and banks' requirement of funds for the financial year-end will be the key determinants of liquidity condition. |
| Most of the banks will require funds for provisioning towards the year-end. |
| On the other hand, the government is expected to start spending, which may ease liquidity. If there are foreign exchange inflows into the market in the form of corporate proceeds, the RBI may intervene to buy dollars and sell rupees. This will be an additional avenue to fund the market along with the repo window if the tightness persists. |
| Call money Fiscal-end blues |
| If the government expenditure does not start, call rates may again shoot up this week. This is because the second week of the reporting fortnight will once again clash with higher provisioning requirement by the banks towards the financial year-end. Moreover, most of the banks will desist from lending to the market on March 31, as it will attract 100 per cent capital adequacy, which will put additional pressure on liquidity. |
| Treasury bills Auction push |
| The RBI will auction 91-day and 364-day T-bills in the market to raise a total of Rs 4,000 crore, both as part of the government borrowing programme and liquidity absorption to tackle inflation.The cut-off yield in the T-bills is likely to inch up following cautious bidding, as the market will be nervous, anticipating tighter liquidity condition. |
| The secondary market may witness investments from banks and primary dealers to build up portfolio for the SLR requirement. The demand for short-term T-bills arises from the fact that they do not attract market valuation. |
| Government securities Rush from banks |
| The government securities market may witness demand from foreign and private sector banks to build up government securities portfolio as part of the SLR requirement to support the deposit growth towards the end of the financial year. However, sentiment will be bearish, as liquidity is likely to be tight, which may push up the yields. Towards the end of the week, the trading will gradually wane. |
| This is likely to push the yields up for dated security to be auctioned as part of MSS "" 6.65 per cent 2009 from 7.96 per cent last week to 8.01 per cent this week. In this backdrop, the ten-year benchmark yield is likely to rule in a wide range of 7.98-8.10 per cent, depending on liquidity. |
| Corporate bonds Dull marts |
| Most of the primary market issuers will take a break towards the end of the financial year. Activity in the secondary market will also remain subdued, as no player will go in for a portfolio rejig towards the end of the year for fear of valuation loss. |
| Another reason for corporates and PSUs to stay away from the bond market will be higher benchmark rates. The yields of the government securities are hovering at higher levels, as trading is lacklustre due to tightness in the liquidity. |
| Rupee Likely to rise |
| The spot rupee may appreciate this week as well, as corporates are set to have lined up proceeds from external commercial borrowings to the tune of around $1 billion. Moreover, if the liquidity crunch persists, banks will be using dollar resources to generate rupee. |
| The downside to rupee may arise from the RBI intervention, which may result in buying dollars to stem rupee appreciation. On the other hand, the rupee has a strong bias for appreciation, tracking the cross currencies, as most of them are on a roll against dollar. |
| However, dealers are of the view that once banks are through with the liquidity provisioning, the spot rupee may bounce back to 44. The tightness may impact the annualised premia on forward dollars. A month-end demand for dollars by corporates will also add to the pressure. |