Outlook : Money Markets

Comfortable liquidity condition should continue if there is no auction

Liquidity in the banking system should rule easy and will be impacted only towards the end of this week if the Reserve Bank of India (RBI) conducts the scheduled Rs 7,000 crore auctions.

According to the government's second-half borrowing programme, there is an auction of a 10-15 year paper for Rs 4,000 crore and another of a 20-year paper for Rs 3,000 crore scheduled for the period between October 3 and 8. As the first three days of the week are holidays, players do not expect an auction prior to Friday.

There has been some tightening of liquidity towards the end of last week as reflected in the amounts going into the repo market. On Friday, the RBI received applications for Rs 9,680 crore and accepted Rs 7,744 crore bids.

The average daily amounts being bid at the repo auctions have fallen to Rs 10,428.4 crore from last week's average of Rs 12,000 crore. The market sees this in the light of increasing credit offtake and a lull in the foreign inflows.

Net inflows to be affected only if auction is slated

This week, while there is a net inflow of Rs 143.9 crore into the banking system, the Rs 7,000 crore auction will lead to a net outflow. However, the market does not envisage any pressure on liquidity, as reflected by the average repo amount going out of the system daily.

The central bank will conduct 91-day and 364-day bill auctions on Tuesday for Rs 1,000 crore, while a 364-day treasury bill worth Rs 750 crore matures on Friday. Further, inflows to the tune of Rs 393.9 crore will come by way of interest payments on short-term gilts.

Call rates to be more stable with limits set

Call rates, which were volatile last week, could turn steadier following the introduction of limitation on call lending and borrowing by banks from October 5, the reporting Friday.

As participants will be aware of how much money they can borrow or lend in the call market, demand and supply will be better structured, leading to greater stability in rates.

At present, the bulk of the borrowing and lending goes through the call market. However, from October 5, banks will be restricted to lend up to 25 per cent of their net worth and borrow up to 100 per cent of their net worth.

The regulator