Advance tax to play spoilsport

LIQUIDITY
RBI intervention to continue

Liquidity will continue to be easy this week till funds move out of the system as part of advance tax flow. The Reserve Bank of India (RBI) will continue infusing liquidity into the system through the repo window.

"Transient factors affecting market liquidity such as advance tax flows can put some pressure in the mid-March which can be managed through the RBI refinance or the repo window," said the RBI status report on liquidity situations in the short term.

For the week ended February 24, while aggregate deposits grew by 16.8 per cent on year-on-year basis, bank credit accelerated at a pace of 31.7 per cent for the same period.

The RBI will continue intervening in the foreign exchange market to mop up dollars and infusing the resulting liquidity into the system to tide over the tight money situation, dealers said.

There will be an outflow of around Rs 1,500 crore towards the treasury bill auction while around Rs 597 crore will flow into the system through coupon redemptions. Towards the end of the week, advance tax ouflow is expected to suck out around Rs 15,000 crore - Rs 20,000 crore from the system.

MONEY MARKET
Calls to ease

Call rates "� rates at which banks borrow and lend for daily fund requirement "� are likely to further ease this week. This will continue till the time funds flow out towards advance taxes.

The call rates are likely to move in the 6.40-6.50 per cent range. Other money market instruments such as collateralised lending and borrowing obligations will also continue to be used by players for arranging funds.

T- BILLS
MF demand seen

The government will auction 91-day and 365-day t-bills for Rs 500 crore and Rs 1,000 crore, respectively, as part of the regular government borrowing programme.

The demand for treasury bills in the secondary market is expected to come from mutual funds. T-bills, being short term in nature, are offering higher interest rates in line with the rising yields. Thus these are a good buy for mutual funds to earn a good yield differential, said an MF dealer.

Recap: Inflation for the week ended February 25 stood at 4.29 per cent as against 4.34 per cent the previous week. Call rates eased to around 6.5 per cent due to state governments' spending spree.

GILTS
Selling bout likely

The gilts market may see some selling pressure. There are apprehensions of a liquidity squeeze after the funds flow towards advance taxes. Before the end of the current fiscal, banks need to set aside funds to participate in the borrowing programme for the new fiscal.

The requirement in this month is also acute as they have to finalise the accounts for this fiscal.In this scenario, the 8.07 per cent 2017 paper, which is the top traded security and the proxy for the ten-year paper, is likely to rule in the 7.40-7.44 per cent range. The bearish sentiment is likely to pull the yield down to even 7.45 per cent, said market dealers.

Recap: The gilt market remained rangebound. However, during the beginning of the week, the yield on the 8.07 per cent 2017 paper even touched 7.48 per cent as the apprehension of the government auction loomed large.

CORPORATE BONDS
Prices may decline

The corporate bond market is set to witness abundant supply in the coming months but the market appetite remains restricted due to a lack of funds.

Banks are expected to come out with Tier-II and hybrid Tier-III bonds to raise long term money for meeting the Basel norms and also to stack up liquidity to meet the year-end requirements.

Oil companies are also likely to offload oil bonds to make payments towards advance taxes. Oil bonds have been offered by the government to oil companies to compensate for the losses incurred during the global oil price hike last year.

However, lack of demand may lead to a crash in prices, thus firming up the spread between the government securities and corporate bonds.

Issuance of commercial papers by corporates and certificate of deposits by banks will continue unabatedly this week as well.

As the interest rates have firmed up, banks as well as corporates would prefer locking into the high costs for short term rather than raising funds for long term.

Recap: The spread between the five-year triple-A rated corporate bonds and the underlying government security has firmed up to 100 basis points.

For the week ended February 15, 1,204 CPs were issued for a total amount of Rs 16,173 crore and a total number of 1,667 CDs were floated by banks to raise Rs 34,521 crore.

RUPEE
FIIs hold the key

The US non-farm payroll data released on Friday indicated creation of 210,000 new jobs as against the expected 200,000.

According to dealers, the strong payroll growth will act in favour of the dollar which may propel it against all other major global currencies.

Domestically, developments in the equity market will hold the key. If a decline happens, foreign institutional investors (FIIs) are likely to liquidate their positions and book profit.

This will put pressure on the rupee-dollar exchange rate. The local currency may loose following the continued RBI intervention in order to infuse liquidity in the domestic market.

Premium paid in rupees for booking dollars for a forward date will continue to be high following the tight liquidity situation. The strain on the exchange rate could be further heightened due to the brisk activity in the non-deliverable forwards (NDF) market.

Anticipating the rupee's fall against the dollar, the players a re-buying dollars here and selling it in the NDF market at a higher premium. These are derivative positions with the underlying rupee-dollar forward exchange rate of various tenure.

The actual payments in this market, based in the South East Asia, is usually made after netting off the positions. against this backdrop, the rupee-dollar exchange rate is expected to hover around 44.20-45.

Recap: The spot rupee remained volatile after foreign institutional investors booked profit in the equity market and converted rupees into dollars.

The pressure on the rupee was also reinforced by the apex bank's dollar buying aimed at infusing liquidity. The cash-crunch had led to a rise in the premium in the forwards market.