Abundant liquidity in the system

OUTLOOK/MONEY MARKET

Liquidity will be abundant in the system though there will be a net outflow of around Rs 11,000 crore. The abundance in liquidity was reflected in repo subscriptions, which hovered around Rs 40,000 crore.

There will be an inflow of Rs 1,737 crore as against an outflow of Rs 12,500 crore on account of treasury bill and government security auctions.

Even then, it is expected that the auctions will sail through without posing any constraint on liquidity. The surplus liquidity in the system has been a result of the sterilization activity of the Reserve Bank of India (RBI) to keep the rupee from appreciating in response to the depreciating dollar. On the other hand, the inflation rate is at 5.63, lower than the market's expectations, which will help the sentiment improve.

However, liquidity is likely to be under pressure during the year as foreign exchange inflows, which contributed to the surplus last year, will tend to get less concentrated in India as rates have firmed up elsewhere also. Moreover, with good economic data, growth is expected to be high and this will get reflected in high credit growth.

Call rates to remain soft

Interbank call rates are expected to rule soft as there is a liquidity overhang in the system. Even though the forex inflows have become moderate, the intervention of the RBI to suck out excess dollars from the market has been adding surplus rupee liquidity. The rupee is being prevented from strengthening against the dollar to make exports competitive, said some dealers.

Structurally, call rates are ceasing to be the only tool for managing day-to-day liquidity in the system. The market is looking forward to the repo system being restructured in line with the proposals in the RBI's liquidity adjustment facility report.

Many options have been discussed in the report including a 7-day repo and the setting up of a market stabilisation fund under the government account which will issue tradable securities to make up for the shortage of gilts with the RBI for monetary management.

Treasury bills

There are two treasury bill auctions slated for this week "" the Rs 1000 crore 364-day T-bill auction and the Rs 500 crore 91-day T-bill auction. The cut-off rates are expected to be extremely competitive going by the market yield of the T-bills.

Last week, the RBI announced a higher cut-off rate of 4.20 per cent for the 91-day treasury bill as compared with the market yield of 4.16 per cent. However, during the year, the 91- day treasury bill has witnessed the highest fall since January, 2003.

As against a cut off rate of 5.45 per cent on 9 January, the T-bill is hovering around 4.20 per cent, a fall of almost 125 basis points.

Interestingly, it is observed that the short-term yields, as indicated by T bill rates, have slipped below the repo rate of 4.5 per cent.

Dealers seem to be enthusiastic of trading in treasury bills as they feel there is still scope for a fall in interest rates in the short end. This is because the short-term yields have not fallen at the rate seen in long-term yields. In fact, yields in the short end have firmed up during the year.