Outlook: Money Markets

Foxing stand could halt price rally despite funds

The abundant liquidity in the banking system has been fuelling the price rally in gilts since the credit policy announcement on October 29. But the Reserve Bank of India (RBI) has hinted that yields cannot go down further.

On its part, the central bank has been trying to suck out the excess liquidity in the past week by accepting all the bids made at the repo auctions. The average daily bids accepted stood at Rs 12,104 crore.

The Monday open market operation is set to suck out an additional Rs 4,500 crore from the system as the RBI auctions the 10.95 per cent 2011 bond.

However, this will be easily absorbed, as Rs 11,790 crore will come back into the banking system on Monday from the three-day repo redemption.

As per schedule, an auction is due this week, which would further suck out Rs 4,000-5,000 crore from the system. But players do not envisage the auction this week as the ways and means advances stands at nil. This indicates that the government has adequate funds, and would not necessarily need to go to the market.

Net outflows could rise if RBI comes out with an auction

The week ahead is slated to see a net outflow of Rs 4,380.6 crore on account of the Rs 4,500-crore open market operation announced.

Inflows during the week amount to Rs 369.7 crore following interest payments on government paper. Net outflows could further rise sharply by another Rs 5,000 crore should the RBI decided to go ahead with the scheduled Rs 5,000 crore auction of government paper.

Should the scheduled auction not take place and the market continues to rally post Monday