Inflation numbers, US Fed move hold key
| LIQUIDITY Comfort continues |
| Even as liquidity remains comfortable, inflation has emerged as a major concern for the market. The pass-through effect of the domestic oil price hike has resulted in higher inflation figure last week. |
| The trend is expected to continue in the coming weeks as well. According to dealers, rising oil prices have a multiplier effect in pushing up the prices of essential commodities. |
| Inflation may continue to move up till August when the effect gets minimised owing to last year's base figures. |
| Dealers feel liquidity which is currently in surplus may gradually start shrinking as both government borrowing and credit offtake will compete for the cash in the system. Foreign exchange inflow, nevertheless is likely to continue. |
| This week inflow is put at Rs 1277.37 crore while outflow would be Rs 35,00 crore. |
| CALL RATES CBLO turns active |
| Call money rates will be comfortable as banks may prefer to park their excess liquidity in the interbank lending and borrowing markets. |
| This is owing to the apprehensions of an auction announcement. Moreover, banks are staying away from investing in gilts because of rising interest rates. |
| As a result, players, ranging from banks and mutual funds to provident funds, have become highly active in the collateralised borrowing and lending obligation (CBLO) market. |
| TREASURY BILLS Cut-off is crucial |
| Two treasury bills - 91-day and 182-day - will be auctioned this week, both for raising funds as part of the government borrowing and also aimed at sucking out excess liquidity under the market stabilisation scheme. |
| Under the 182-day t-bill, Rs 500 crore gets absorbed towards government borrowing while MSS will strain another Rs 1,000 crore. Similarly, in the 91-day t-bill, the government borrows Rs 500 crore and RBI drains another Rs 1,500 crore from the system. |
| The cut off yield at the auctions will be crucial going by the trend of rising yields of the government securities across maturities. |
| Recap: The annual inflation rate stood at 5.24 per cent for the week ended June 10 - up 52 bps compared with the figure during the week ended June 3 - factoring in the recent oil price hike in the domestic market. |
| GOVERNMENT SECURITIES Waiting for Fed cue |
| The market is eagerly waiting for the outcome of the open market committee meeting of the Federal Reserve salted for June 29. |
| In line with the global market expectations, domestic bond dealers have also factored in another quarter per cent hike in the Fed rate. More important, said a dealer, was the tone of the statements to follow which are suggestive of the course of auction to follow. |
| Inflation worries, which played spoilsport last week, continue to dent the market sentiment and may result in cautious trading. |
| A higher inflation could also result in tougher monetary measures aimed at straining the excess liquidity, said a dealer adding this would keep the market on tenterhooks this week. |
| To this backdrop, the ten year benchmark yield is likely to hover in the 8.10-8.30 per cent range. |
| Recap: The trading in the market was thin due to a cautious approach by players. Possibility of a rate hike by the Federal Reserve, another quarter per cent increase in reverse repo rate by the RBI in its July policy and rising inflation acted as triggers for the market to remain cautious. |
| CORPORATE BONDS Slack demand to stay |
| The bond market is in a state of illiquidity with virtually no trading interest from either banks or primary dealers or mutual funds. Provident funds are the only participants who are seen buying bonds to enhance the yield. |
| On the other hand, a host of public sector undertakings have lined up floats to raise funds as part of their borrowing programme from the domestic market. |
| According to bank dealers, these papers might not fetch any interest unless they offer higher interest rates. |
| While these issues are offering 8.5-9 per cent for 10-15 year maturity, banks are raising bulk deposits through certificate of deposits at 8-8.5 per cent for one year. Some of the PSUs in the fray include Nuclear Power Corporation and National Thermal Power Corporation. |
| The hike in reverse repo rate, which is seen as a benchmark for the short-term interest rates, has led to a substantial firmness in the interest rates for placing commercial papers and certificate of deposits. |
| For the fortnight ended May 31, rates on CPs have moved up from 7.95 per cent to 9.25 per cent while CDs fetch 8.6-8.7 per cent. |
| Recap: The spread between the 10-year triple-A rated corporate bond and the government security has narrowed to 90 basis points. The increase is due to rising gilt yields that act as the benchmark for the pricing of the corporate bonds. Trading in the corporate bond market was lacklustre. |
| RUPEE To stay ranged |
| The spot rupee is likely to rule rangebound with a bias towards depreciation. In the domestic market, dollar demand from oil companies seems to be a major trigger for weakness. |
| Globally, the greenback is likely to firm up following high probability of another quarter per cent hike by the Federal Reserve in the open market committee meeting on June 29. On the other hand, Bank of England, dealers feel, may not pursue a strong policy of increasing interest rates as the economic data remain benign. |
| Support for the local currency may come from foreign banks which were seen selling dollars last week. This was assumed to be dollar sales on behalf of foreign institutional investors (FIIs) following an upturn in domestic equity markets. |
| The apex bank is also expected to step in selling dollars and protecting the rupee if the local currency is seen fast depreciating, said dealers. |
| On the other hand, rupee premium for booking dollars for future months "� forward dollars "� may firm up further. |
| This is expected as the market dealers feel that the RBI may increase the shot-term benchmark reverse repo rate by 25 basis points in its quarterly monetary policy review. Therefore, with the increase in the cost of rupee funds, forward dollars are likely to fetch a higher premium. |
| In this backdrop, the spot rupee is expected to open in the range of 45.90-46.40 against the dollar. |
| Recap: The spot rupee lost around 23 paise to close the week at 46.12-46.13 after opening at 45.90. |
| The weakness is owing to dollar demand from oil companies and partly due to the cross currency effect of weakening yen and pound. The dollar had been gaining following expectations of another rate hike by the Federal Reserve. |