Bearish trend seen

MONEY MARKETS

Liquidity comfort on

There is ample liquidity in the system which is a comforting factor. The government securities market has already factored in a hike in reverse repo rate in the forthcoming quarterly review of monetary policy. Inflation due to crude spike remains a concern, though crude prices have subsided. The demand for oil is expected to grow in the coming winter.

However, the rejection of bids by the Reserve Bank of India (RBI) in the last week's bond auction has sent a positive trigger to the market.

Some dealers feel if oil prices and inflation remain moderate, RBI might not go ahead with an increase in reverse repo rate in the credit policy which is to be announced by the month-end. The coming week will witness an outflow of Rs 4,000 crore towards t-bill auctions and inflows to the tune of Rs 1,995 crore.

Calls to rule soft

The inter-bank call rates, at which banks lend or borrow for daily fund management, are likely to rule soft given surplus liquidity in the banking system. The surplus comes from the government's expenditure and also because of banks' unwillingness to invest. However, there is concern about the impact on liquidity due to profit booking by foreign institutional investors (FIIs).

Cut-off yield may dip

Treasury bills auctions worth Rs 4,000 crore are scheduled for this week. While 91-day t-bill and 364-day t-bill will be issued for a notified amount of Rs 2,000 crore each, it will form part of the government's borrowing programme as well as the market stabilisation scheme.

The cut-off yield on t-bills is expected to be lower. FIIs and public sector banks are expected to retain interest in t-bills as the outlook on long-term interest rates remain uncertain.

Recap: Inflation inched up to 3.97 per cent during the week ended September 24 from 3.75 per cent a week ago. This was mainly due to the increase in the prices of industrial fuel and manufactured products even though food items became cheaper.

CORPORATE BONDS

To track gilts

The corporate bond market will track the government securities market. Dealers said trading interest will emerge only if the spread between corporate bonds and comparable government security firms up a bit. With rise in gilt yields, the spread has been gradually narrowing. Moreover, with uncertainty on the interest rate front, bond issuers might wait for a better time to tap the market. The Central Board of Trustees of the Provident Fund Organisation is likely to remain a big buyer of corporate bonds at low prices for earning better yield differential.

They were heavy buyers of bank bonds last week.

Meanwhile, commercial papers (CPs) and Mibor-linked non-convertible debentures (NCD) remain the most popular instruments among corporates for raising money, especially for the oil companies.

These instruments are popular because they are short-term papers and it is easier to raise money and roll it over at frequent intervals.

Recap: The spread between the five-year government security and triple"�A corporate bond fell to 35 basis points. There were new issues in the market.

The commercial papers issued for the fortnight ended September 30 amounted to Rs 19,695 crore with interest rates ranging from 5.45 to 6.65 per cent.

GOVERNMENT SECURITIES

On a cautious run

The government bond market remained cautious. The entire market has factored in a likely 25 basis points hike in reverse repo rate to be announced later this month.

Therefore, the yields have gone up. Secondly, with the second quarter over, there is no incentive for the bankers to buy papers. The banks can afford to wait for a clear signal on interest rates. Since all the bids at last week's government bond auction were rejected, there might be another auction to complete the leftover borrowing of Rs 6,000 crore. Even in the US, the yields have gone up following a robust non-farm payroll data. In this backdrop, the ten-year yield is expected to remain in the 7.05-7.15 per cent range.

Recap: The government securities market remained lacklustre till the auction. After the rejection of all the bids, the market witnessed a rally and the price of the highly traded 10.25 per cent 2021 paper went up by almost 50-60 paise during the last two trading sessions of the week.

CURRENCY

Rising dollar to put pressure on Re

According to market dealers, the rupee will continue to reel under a bearish sentiment.

The primary reason is the robust non-farm payroll data released in the US, which is expected to support the dollar. The US non-farm payrolls fell by only 35,000 in September and not by 150,000 or higher as was feared. Still, it was the first decline in more than two years, said the report.

FIIs have turned sellers, both in the debt and equity markets, as they are in a profit-taking mode fearing a further correction in the equity markets. FII inflows were negative last week.

Again market players fear panic among importers if the spot rupee breaches 44.45.

Importers have already started covering their foreign exchange exposure for near term of one to two months.

Spot rupee at 44.45 will compel importers to take forward cover even for longer term.

The spot rupee will trade in a range of 44.25-44.35 with a bias towards further depreciation.

Forward premiums on the other hand, will track the spot rupee.

Premiums would definitely go to new highs if importers crowd for forward cover, said a forex dealer.

Recap: The spot rupee lost almost 50 paise last week compared with a closing of 43.92 in the previous week. The market witnessed dollar demand by importers and banks even as foreign institutional investors inflows turned negative.