Liquidity to stay robust; Rupee ranged
WEEKLY MONEY & CURRENCIES
| There are several factors propelling liquidity, which continues to remain in the surplus even after advance tax outflows. The government expenditure, aided by foreign exchange inflows, are contributing to the liquidity in the system. The forex inflows have primarily increased due to the public issues of banks, according to dealers. Going forward, the market is set to witness inflows towards the public issue of DLF and ADRs of HDFC Bank, though not this week. |
| On the other hand, the RBI has been protecting the rupee-dollar exchange rate at 40.70 as was seen last week. The excess liquidity, generated through the intervention of the RBI in the foreign exchange market by purchase of dollars, is not being countered by any liquidity-tightening measures in the domestic market. After a gap of two weeks, the RBI has enhanced the size of the treasury bills auction this week. This week will witness an inflow of around Rs 531.29 crore as against an estimated outflow of Rs 11,000 crore. |
| Call rates Seen around 1-2% |
| The call rates may continue to rule around 1 to 2 per cent. Dealers are of the view that liquidity will continue to remain comfortable even after the auction of treasury bills. However, the situation may change if the RBI announces any long-term measures to suck out the excess liquidity such as a CRR hike or advancing of a government security auction. Banks will also have to set aside liquidity for the reporting Friday, starting June 25. |
| Treasury bills Bigger auction |
| The RBI has increased the size of auction under the treasury bills by Rs 7,500 crore, thus taking the total amount to Rs 11,000 crore as against the usual notified amount of Rs 3,500 crore. However the entire amount will be auctioned to meet the government expenditure. Since the market is flush with liquidity, the cut-off yield is expected to moderate further compared with the last week's yield. |
| Brisk trading will continue in the secondary market since portfolio of treasury bills do not attract market valuation. These papers are of particular interest to the custodian foreign banks, which handle investments on behalf of foreign institutional investors. |
| Recap: The cut-off yield on the 91-day t-bill figured at 7.19 per cent as against 7.77 per cent last week due to ample liquidity in the system. The call rates consistently remained below 1 per cent. Inflation for the week ended June 8 figured at 4.2 per cent. |
| Government securities Rally likely |
| The government securities market is expected to witness a small rally if the RBI desists from announcing any major liquidity-tightening measures such as a CRR hike or bringing forward the auction of dated security. |
| The trading will be spurred by demand from banks to meet their SLR requirement as well. While excess liquidity in the system is leading to concerns over the RBI measures among the players, inflation on the lower side has been a silver lining. |
| While the week may start with brisk trading among the players, sustaining the tempo will depend on the liquidity situation. If the treasury bill auction of Rs 11,000 crore is not countered by foreign exchange inflows, liquidity may come under pressure and trading will be cautious. However this may not affect the yield on the ten-year benchmark paper. |
| In this backdrop, the yield on the ten-year paper is expected to rule in the range of 8.15-8.20 per cent. |
| Recap: The yield on the government securities remained rangebound since the market apprehended liquidity-tightening measures from the RBI. However, towards the end of the week, the market witnessed a rally in prices following inflation figure, which was much below the market expectation. |
| Corporate bonds CDs galore |
| There are very few long-term issues lined up this week, which includes upper tier-II bonds of State Bank of Patiala. While the bank is yet to firm up the amount, it is offering 10.25 per cent for the 15-year bonds, with a call option at the tenth year. This means the bank will have the discretion to call back the bonds for premature redemption. |
| A host of banks are raising funds through certificate of deposits (CDs), while commercial papers have become popular among non-banking finance companies (NBFCs). |
| Even though the CD rates have come down, they vary from bank to bank. While State Bank and its associates are offering 9.45-9.50 for one year paper, private sector banks raise funds at 9.55-60 per cent for one year. While insurance companies continue to buy long-term bonds, cash-surplus mutual funds have been active in short-term papers of one to two years' maturity. |
| Recap: The spread between the 10-year government security and the triple-A corporate bond of similar maturity continued to rule around 150-160 basis points. |
| Rupee Seen in a range |
| The spot rupee is likely to rule rangebound during the week. The market is neither expecting much inflows into the market nor outflows. The routine inflows towards the equity market will depend on the performance of the market and any major inflows will be countered by demand from oil companies. "Oil companies are usually active around 40.65-75 to a dollar for making the oil payments," said a dealer. |
| However, market dealers feel that if the RBI announces any liquidity-tightening measures during the week, it may impact the exchange rate. Arbitrage in non-deliverable forward market (NDF) will also drive the exchange rate in the absence of any other major trigger. NDF is a derivative market operating overseas, wherein trades are done on the underlying of the rupee-dollar exchange rate. |
| Forward premium, on the other hand, will remain moderate since rupee liquidity is abundant. However, if the liquidity tightens during the week, it may firm up, though it is unlikely. Besides oil firms, other importers are looking at lucrative levels to buy forward dollars, at least for their near-term requirement. In this backdrop, the spot rupee is expected to rule in the wide range of 40.60-40.90 to a dollar. |
| Recap: The spot rupee remained rangebound even as the market witnessed inflows in the form of IPO proceeds of ICICI Bank. The RBI intervened actively to check the spot rupee within the band of 40.70-80 during the entire week. Forward premia on dollars remained lower due to abundant rupee liquidity in the market. |