CRR hike likely to drain out cash

WEEKLY MONEY & CURRENCIES

Towards the weekend, banks may prefer to be cautious in lending and prepare for the second tranche of the cash reserve ratio (CRR) hike, which makes banks to set aside 8 per cent of their total deposits with the Reserve Bank of India (RBI) from the current 7.75 per cent.

While the foreign exchange inflow is subdued, foreign banks may swap rupees to raise dollars. The need for dollars may arise from their custodian clients (foreign institutional investors), with market players seeing an outflow of foreign funds from the equity market soon.

 

In this backdrop, the system will witness an inflow of around Rs 891 crore as against an outflow of Rs 25,700 crore. The outflow includes the second tranche of the CRR hike by 25 basis points.

Call rates: May rise
Call rates, at which banks lend and borrow funds from each other in the inter-bank money market, will continue to rule soft, given the easy liquidity in the system.

Mutual funds are awash with liquidity and this may drive up yields in the collateralised borrowing and lending obligation market (CBLO). Rates may even go down to a low of 1.5-2 per cent.

However, towards the weekend, call rates may firm up a bit, with the second tranche of the CRR hike coming into effect from May 10.

Treasury bills: Lower yields
RBI will auction the 91- and 364-day treasury bills (T-bills) for Rs 3,000 crore and Rs 3,500 crore respectively. While the 91-day T-bills will be issued to raise funds as a part of the government borrowing, Rs 3,500 crore will be absorbed through the 364-day T-bills under the Market Stabilisation Scheme (MSS).

G-sec: Seen bullish
The outlook for the government securities market (G-sec) remains mixed. A section of the market is of the view that demand for gilts will go up following the need for banks to maintain the statutory liquidity ratio (SLR).

Another section of the market feels that there may be a selloff of gilts that dealers had accumulated after the announcement of the credit policy.

The sentiment in the gilts market is bullish as a slowdown in credit offtake is leading to an increase in investments in gilts. The yield on the ten-year benchmark may rule in a wide range of 7.75-8 per cent.

Rupee: May weaken
The spot rupee is expected to rule in a range as there are no fresh triggers for the market. The non-farm payroll data released in the US last Friday have been bullish on the dollar.

However, this does not augur well for the rupee due to a rise in demand for dollars.

The spot rupee is expected to rule in a range of 40.50-41 to a dollar.