Bunched-Up Demand To Put Pressure On Liquidity

Liquidity is expected to come under temporary pressure this week following the bunching up of demand to meet advance tax outflows and reserve requirements for the reporting Friday.

Although clear reasons are yet to surface, repo subscriptions on Friday slumped to around Rs 9,000 crore from the average daily figure of over Rs 18,000 crore.

While some say the market players preferred to stay liquid to meet demand from corporate clients for advance taxes, others feel that the State Bank of India, one of the aggressive participants in repos, stayed out in a bid to save liquidity to meet Resurgent India Bond redemptions.

 

Looking at the inflow-outflows for this week, it is clear that outflows far exceed inflows. Even if a clear figure of advance tax flows is yet to be ascertained, the market estimates it to stay in the Rs 8000-10,000 crore range.

In addition to this, there will be an outflow of Rs 2500 crore towards the 91-day and 364-day treasury bill auctions.

As against a total estimated outflow of Rs 10,500-12,500 crore, inflows will be to the tune of Rs 1,492 crore through the maturing of treasury bills and coupon redemptions.

These factors have led to selling pressure by mutual funds and banks, besides redemption pressure and quarter-ending profit booking. However, crucial figures to be watched this week will be inflation.

Though inflation has been going down on a week-on-week basis , this is expected to stay a bit high as the effect of the hike in oil prices might get reflected with a lag.

The interest rate outlook for the week remains a bit bearish for the beginning of the week. However, a quick recovery is expected with the fall in yields capped.

Long-term rates are expected to go up a bit, while a limited upward movement is likely in the medium term. However, rates are expected to be flat in the short term.

Overnight rates seen edging upwards

Inter-bank call rates are expected to rule a bit tight with apprehensions of advance tax outflows aggregating to Rs 8000-10,000 crore.

Demand from players for meeting reserve requirements for the approaching reporting Friday might put some pressure in the beginning of the week.

Last week, call rates ruled easy despite heavy borrowing by primary dealers. Liquidity was ample as is evident from the repo subscriptions at around Rs 15,000 crore on average.

There was a significant drop in repo subscriptions on September 12 to around Rs 9000-odd crore.

Treasury bills

There are two treasury bill auctions slated for September 17 for a notified amount of Rs 2,500 crore