Liquidity, Inflation To Boost Sentiment

Liquidity should be easy this week with no major outflows expected except for the Rs 7,000-crore auction and treasury bill auctions of around Rs 1,500 crore.

All state government have put the 6.35 per cent ten-year state government paper on-tap sale towards the state centre debt swap programme.

Inflows are expected to be around Rs 2063 crore on account of coupon redemptions. Therefore, the market will have a net outflow of around Rs 6500 crore.

Moreover, the market is buoyant on the back of foreign exchange inflows due to lucrative interest rate differentials.

However, net liquidity might come under pressure due to the advance tax outflows coming up next week.

Last week, the market was flush with liquidity leading to a rally in government securities and corporate bonds. Average daily repo subscriptions hovered in the Rs 15,000-20,000 crore range.

Inflation is expected to be low owing to a fall in petroleum prices and this might add to the positive sentiment on account of good liquidity. Besides, any market related statement from regulatory authorities could influence the trend.

This statement issued by the Reserve Bank of India (RBI) on Friday ruling out a repo rate cut for some time marred the market rally towards the end of last week.

Commenting on the 50 basis points cut by the European Central Bank (ECB), the RBI clarified that inflation levels in the major European countries were much lower than in India. The market was anticipating a repo rate cut.

However, the market is still hopeful of a repo rate owing to the interest rate differential between the rupee and other currencies.

Forex inflows to keep call rates low

Call rates are expected to rule in the 4.65-4.9 per cent range and could soften if the foreign exchange inflows are good. Although this week has the reporting Friday, market players have already covered for it.

However, there might be a bit of pressure on call rates on account of the advance tax outflows that are expected to come up next week.

Overnight rates ruled in 4.75-4.9 per cent band last week on the back of good liquidity. The rates were a bit on the higher side in the initial part of the week owing to the two auctions (reissue of the 6.85 per cent 2012 paper and the new issue of 25-year paper).

Market related cut off seen at T-bill auction

There are two treasury bill auctions slated for this week on June 11 and players expect a market related cut-off yield on these. On the other hand, there are two 91-day and 364- day t-bills redeeming, resulting in an inflow of Rs 1250 crore on the reporting Friday.

The initial part of last week witnessed good trading interest in treasury bills due to good arbitrage opportunities. According to market players, with cash spot dollar ruling at par and even at a discount, dollars swapped with rupee and invested in 91-day treasury bills returned a good yield even after taking into account the cost of three-month forward cover along with the Libor.

However, the rally was halted with public sector banks intervening in the near-term dollar market on behalf of the Reserve Bank and buying dollars. This resulted in a hike in forward premia and cash spot dollar rates, said dealers.