Re to stay ranged; gilts low key
OUTLOOK
| LIQUIDITY Pinch may continue |
| Money market participants expect the current tightness in liquidity to continue in the early part of this week too. According to a dealer with a private bank, the situation is expected to return to "normalcy" by the weekend. This might probably happen once the effect of the auctions weighs down, he said. |
| Traders said lingering liquidity shortage had triggered concerns that funds may remain scarce for a while, unless the Centre and state governments considerably stepped up spending. |
| Liquidity infusion into the banking system through the Reserve Bank of India's (RBI) repo window on Thursday and Friday last totalled Rs 20,630 crore and Rs 26,000 crore, respectively. |
| The RBI has announced the auction of 91-day t-bills for a notified Rs 500 crore under the regular auction calendar. It has also announced the auction of 364-day treasury bills for a notified Rs 1,000 crore under the regular auction calendar. The auctions under market stabilisation scheme (MSS) remain suspended. |
| CALL RATES Overnight rates to stay high |
| Debt dealers see the overnight call rate in a higher range of 7.00-7.25 per cent early in the week. Traders feel that by mid-week, call rates would stabilise below the repo rate of 6.25 per cent. |
| Traders said the firmness in call rates would be due to delayed government spending, fresh borrowings by the government and increased demand for funds from banks. |
| Recap: The beginning of the past week saw the squeeze on banks' cash surpluses, sharply pushing up overnight borrowing costs and getting weighed down by a rise in prices of crude oil. A month-long squeeze on banks' cash surpluses steadily pushed up overnight funding costs to a 3-1/2-year high to 8 per cent on Friday. |
| On Monday, the inter-bank overnight funds rate had ended at 6.8/6.9 per cent as banks scrambled to borrow money to meet reserve requirements at the start of the new two-weekly reporting cycle. |
| INFLATION No cause for concern |
| Market participants feel, currently, inflation is well under control and there is no major cause for concern. Also, they do not foresee any major hike in price levels at least in the immediate future. |
| Given the fact that inflation has been mostly stable and the credit spread between corporate and government bonds has widened significantly over the past one month and liquidity has been tighter, analysts expect the central bank would not make any changes in key interest rates in the January 24 monetary policy review. |
| With inflation rate running well below the central bank's end-March forecast of 5.0-5.5 percent, investors are anxious to see if the RBI holds off from raising rates at its quarterly policy review on January 24. |
| Recap: The wholesale price inflation during the week ended December 31, 2005 was 4.40 per cent, unchanged from the previous week. Manufacturing output in November grew 8.1 per cent from a year ago, prompting analysts to suggest the central bank would stay on a gradual tightening course to keep growth on track while keeping a lid on inflation. |
| CORPORATE BONDS Volumes will be low |
| According to money market dealers, unless there is any major change in the movement of yields on government securities, the corporate bond market is unlikely to witness any broad activity. |
| They attribute the current lacklustre nature of volumes to the lack of adequate liquidity. Dealers foresee no major activity in the segment at least till the credit policy announcement is made by the central bank in the last week of January. |
| Among players slated to raise funds this week, are UTI Bank, Bank of Maharashtra and Nabard. National Bank for Agriculture and Rural Development is in the market to raise Rs 200 crore through a private placement of bonds, debt dealers said. |
| Among banks, state-owned Bank of Maharashtra plans to raise Rs 200 crore through an issue of bonds to shore up its Tier-II capital, while private sector UTI Bank might consider raising up to Rs 1,000 crore through unsecured redeemable debentures in one or more trenches to raise fresh Tier II capital. |
| Recap: The current spread on a five year AAA-rated corporate bond stands at 56.42 basis points. |
| GOVERNMENT SECURITIES Fresh positions unlikely |
| The government securities market looks range-bound as dealers are expected to refrain from taking any fresh positions in a market starved of cash. |
| Traders said the lingering liquidity shortage has triggered concerns that funds may remain scarce even this week unless government steps up spending significantly. |
| The benchmark gilt will be illiquid even this week with its yield at 7.07 per cent. The yield on actively traded 8.07 per cent 2017 government bond is expected to move in a band of 7.20-7.25 per cent. |
| Further, the government is scheduled to borrow in the first week of February, which is contributing to the lacklustre trading in government bonds, said traders. |
| Recap: The yield on the 8.07 per cent 11-year gilt ended the week at 7.202 per cent up from Monday's close of 7.19 per cent. The market has been lacklustre as steady cash tightness in the domestic banking system pushed up the call rates to a three and a half year high of 8 per cent. |
| Traders said the lingering liquidity shortage had triggered concerns that funds may remain scarce for a while unless the Centre and state governments considerably stepped up spending. Bonds even shrugged off the encouraging weekly inflation data. |
| CURRENCY MARKETS Dollar swings hold key |
| The rupee is expected to trade in a wide range of 45.20-45.60 per dollar. The currency is expected to show a two-way movement taking cues from the movement of Asian currencies against the dollar and foreign inflows into the forex and equity markets. |
| Said a chief dealer, "Dollar looks very volatile in the overseas market. If the yen or euro continues to rally vis-à-vis the dollar then the rupee will gain support at these level. On the other hand, if these currencies slide this week, then it will weigh on the rupee." |
| Analysts say rupee looks very choppy, given the fact that there was a wide gap between the closing and the subsequent opening levels of the rupee last week. |
| Recap: The rupee eased from three-month highs on Friday as the dollar rose against the yen and other Asian currencies after data showed the US trade deficit had narrowed in November. |
| The rupee ended the week at 44.25 per dollar from Monday's close of 44.29. The rupee touched a three-month peak on Thursday to close at 44.13 per dollar. The rupee is up about 1.8 per cent against the dollar this month, helped by net foreign fund investment of $587 million in stocks and the dollar's overseas losses. |