Liquidity enters comfort zone

Liquidity has once again increased in the banking system with maturing government securities and coupon redemption. This continues to be a source of comfort for the market which could trigger a buying demand by banks.

Going forward, demand for liquidity may rise due to government borrowing and fund raising by banks for capital adequacy. Forex inflows may not be as robust as earlier.

The report on the capital account convertibility has asked for a complete ban on participatory notes which is a frequently used instrument for institutional investors to invest in the Indian market.

The proposal, if accepted, may not gel well with the markets even as the report has asked for higher limits of FII investment in government securities and corporate debt market.

The banking system will witness an outflow of around Rs 3,500 crore as against an inflow of Rs 1,002 crore.

CALL MONEY
Ranged run

With no major outflow slated for the week, call rate is expected to open in the range of 6.05-6.10 per cent.

The market expects the bids for reverse repo to be low as banks may set aside funds for advance taxes due around mid-September. Reverse repo is the mechanism through which the RBI absorbs excess liquidity from the system.

TREASURY BILLS
Low yields to stay

The cut-off yield in the auction for treasury bills will be driven primarily by brisk trading in this market. Besides banks, mutual funds have also joined the trading spree for t-bills.

This is because MFs have to invest the subscription to to these liquid schemes which are primarily short term in nature.

There are two treasury bills to be auctioned this week - 182 day t-bill for Rs 1,500 crore and 91-day t- bill for Rs 2,000 crore. The amount forms part of the government borrowing programme as well as market stabilisation scheme.

Recap: The wholesale price index (WPI) remained higher at 4.91 per cent for the week ended August 19. Inflation has inched up to a six-week high of 4.92 per cent for the week ended August 12 as against 4.82 per cent for the week ended August 5.

GOVERNMENT SECURITIES
Auctions on cards

The government securities market will remain active with trading interest from banks and demand from provident funds and mutual funds. However, the undertone will be a bit bearish following the healthy US non-farm payroll data.

This has again raised the fear of a relook in the decision of upward rate revision by the US. However, the last FOMC meet ruled out any such move.

Secondly, there may be an auction announcement this week. The market is expecting government borrowing to consist of a medium-term paper of 8-10 years and a long-term paper of the maturity of 25-28 years. In this backdrop, the ten-year benchmark paper is expected to rule in the range of 7.85-7.90 per cent.

Recap: The market rallied in the beginning of the week but the trading remained subdued following anxiety over auction announcement and the US non-farm payroll data.

CORPORATE BONDS
Foreign banks new entrant

The corporate bond market has become active with buying interest from non-banking finance companies and mutual funds. This is in addition to brisk trading in commercial papers and certificate of deposits.

Another new entrant in the corporate debt market has been foreign banks who are buying these papers and holding them for a very short period.

New issues from banks and public sector undertakings are expected to tap the market for raising funds. This includes tier II issue from State Bank of India. The bank will raise around Rs 1,000 crore and has the option to mop up more under the greenshoe option.

In the fray, are Punjab National Bank and Konkan Railways. Earlier, most of these corporates were waiting for interest rates to stabilise before they firmed up their plan to raise money.

In the secondary market, mutual funds are also seen investing in commercial papers and certificate of deposits to deploy their inflows to 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 narrowed to 75 basis points. The five-year and 10-year triple-A bonds are trading in the range of 8.50-8.60 per cent and 8.90-9.00 per cent, respectively, which is roughly around 100 basis points spread over the corresponding gilt.

RUPEE
May slip as $ gains

Globally, oil prices have come down to below $70 per barrel and are currently ruling around $68.72 per barrel.

While oil remains a comfort, the non-farm payroll data released in the US last week has fuelled the expectation that the Federal Reserve may have a relook at its decision of not not opting for rate hikes. This has led to considerable strength of the dollar.

On the other hand, the Japanese government's decision to gradually move towards rate revision has left scope for the market to sit up and take a note.

While the market is yet to factor in the weak US data completely for dollar pricing, similar weakness witnessed in the Japanese economy has been factored in fully. Therefore, weakness in the yen is casting a spell over all other Asian currencies including the rupee.

Therefore, the spot rupee is likely to rule with a bias towards depreciation. Premiums on forward dollars will continue to rule high.

Importers are buying dollars both for oil and non-oil imports. The anxiety over Federal Reserve's likely rethink over rate hike has widened interest rate differential between the US and India.

The supply is restricted to only dollar sales by exporters. Foreign exchange inflows from institutional investors to the Indian equity market continue to remain muted. In this backdrop, the spot rupee may move in a range of 46.50-60 to a dollar.

Recap: The spot rupee weakened during the week following a weakness in the yen even as the dollar weakened against all other major currencies globally.

However, with strong non-farm payroll data, the dollar again gained against all other major currencies during the end of the last week. Premiums on forward dollars continues to remain high due to buying by importers.