Advance tax outflows will be key driver

WEEKLY MONEY & CURRENCIES

Liquidity: Bear control
Liquidity in the system may remain easy but the sentiment will be bearish. Even as the market was apprehensive following advance tax outflows, the additional line of liquidity adjustment facilities announced by the Reserve Bank of India have eased the tension.

The market is anxious since there are no additional sources of funds as was the condition last year when the market witnessed a deluge of foreign exchange inflows. The inflows have taken a backseat this year due to sell-off in asset classes across the globe following dollar crunch and the sub-prime crisis.

Call rates: To remain firm
The call rates will continue to remain a bit firm till the impact of outflows towards advance taxes gets assessed.

Even if the RBI has arranged additional liquidity adjustment to infuse funds if required, the sentiment will remain bearish till the full impact of the outflows are known, said a dealer. The interest rates in the collateralised lending and borrowing market may also remain a tad higher.

T-bills: No additional auction
The RBI will auction 91-day and 182-day treasury bills only for government borrowing. There are no additional bonds or treasury bills being auctioned for absorbing liquidity under market stabilisation scheme (MSS).

Advance tax outflows and its likely impact on the liquidity in the short term will weigh on the cut-off yields at which these bills will be auctioned. According to dealers, while the cut off yield in the 182-day t-bill may ease, the 91-day bills will continue to be sold at the same rates of 7.34 per cent.

Corporate bonds: Long-term plan
There will no major issues either in the short-term or long-term papers. Banks have already raised funds through placement of certificate of deposits. Since outlook on liquidity is bearish and outflows towards advance taxes are due, banks with dire necessity may venture out for borrowing, said a dealer.

Some banks are definitely planning long-term funding through tier-II issues, but will wait till the outflows happen, added a dealer. The interest rates in the shorter end of the maturity have been consistently sticky following the apprehension on short-term liquidity.

Therefore, since outflows are yet to happen, the anxiety will be factored in, which will push up the rates further. Hence, banks and financial institutions are likely to wait.

G-Sec: Lacklustre on low liquidity
The government securities market will continue to remain lacklustre since liquidity remains the primary concern.

"Moreover, the week is short and market will first try to assess the impact of the advance tax outflows before making any fresh purchases," said a dealer. The benchmark 10-year paper will move in a narrow range of 7.60-7.63 per cent.

Rupee: In depreciation
The spot rupee ruled with a bias towards depreciation since there are fresh inflows expected to come into India.

Following weakness in global markets, most of the investors are busy profit booking in major markets. Added to the frenzy is the sharp appreciation of yen against dollar.

Given the demand of dollars, the premium to be paid for booking dollars for future may inch up. In this backdrop, the rupee dollar rate is expected to rule in the range of 40.37-40.45 to a dollar.

Post script:
Equity market fell sharply while January 2008 index for industrial production figured at 5.3 per cent as against 11.7 per cent a year ago.