Tight fund flows may impact gilts, bonds
WEEKLY MONEY & CURRENCIES
The possibility of an interest rate hike or increase in the cash reserve ratio (CRR) by the RBI, is also a matter of concern. These measures will severely impact interest rates and liquidity respectively.
The system will witness inflows of around Rs 1922 crore as against outflows of Rs 13,500 crore, which would include an outflow of Rs 10,000 crore towards the government borrowing programme. The additional liquidity will be absorbed through advance taxes.
Call rates: Firming up
The call rates at which banks lend and borrow funds from each other are likely to firm up following tight liquidity.
Selling of dollars by the RBI to stem rupee depreciation may absorb excess liquidity from the market. Besides, the rate hike expectation has made the liquidity outlook bearish. The call rates may therefore rule in the range of 7 to 7.5 per cent.
Treasury bills: High demand
The Reserve Bank of India will auction treasury bills only for government borrowing programme and not under market stabilisation scheme (MSS). Given the apprehension of tight liquidity, the cut-off yield for the auction will be higher by 5-10 basis points compared to the earlier auctions.
In the secondary market, there will be good demand for treasury bills both from banks and mutual funds. Since the outlook on long-term liquidity and interest rates are uncertain, banks are cautious about investing in long-term bonds. On the other hand, investments in t-bills are immune to interest rate movements.
Corporate bonds: Fund-raising drive
In the long term corporate bond market, Housing Development Finance Corporation (HDFC) and Nabard are expected to raise funds. Rural Electrification opened its fund raising programme last week by issuing 10-year bonds which will close during the week.
In the secondary market, mutual funds will be on a selling spree to avoid valuation loss on the government security and corporate bond portfolio. According to dealers, they would rebuild the portfolio by buying papers at a lower rates.
Banks and non banking finance companies are expected to raise funds through short-term instruments such as commercial papers and certificate of deposits. However, the interest rates will remain high.
G-sec: Nervousness ahead
Apprehensions of a rate hike and CRR hike is keeping the market on tenterhooks.
The ten-year yield touched a high of 8.25 per cent on Friday. According to dealers, it had reached 8.42 per cent and 8.44 per cent on June 2007 and July 2006 respectively. They explained the ten-year yield usually rules higher in June - July as the government proposes to cover a major portion of its borrowing programme in the first half of the financial year.
The market has already discounted a 25 basis point hike in the repo rate, but a 50 basis point hike might further hurt sentiment. The cash reserve ratio is a portion of the total deposits garnered by banks over a fortnight and deposited with the RBI as a statutory obligation.
Rupee: Positive bias
The spot rupee is likely to have a positive bias. Since the purchase of dollars by oil companies has been insulated, it has taken pressure off the market.
The RBI may hike the interest rates and the cash reserve ratio to tackle inflation. In this case, the Indian equity market will get foreign exchange inflows through portfolio investors, propping up the rupee.
On the other hand, dealers are of the view that oil companies prefer to buy dollars from the market rather than resort to the open market purchase window of the RBI. Therefore, the demand from the oil companies will continue to exist.
However sharp depreciation of the rupee will be checked by selling of dollars by the Reserve Bank of India. For the week ended May 30, 2008, the RBI sold over $1.5 billon dollars to check the rupee depreciation.
In the forward market, the apprehension on tight liquidity conditions will keep the cost of rupee high. This in turn will result in higher premia to be paid for booking forward dollars.
In this backdrop, the spot rupee is expected to rule in a wide range of 42.10-42.90 to a dollar.