Cut-off yields hold the key

OUTLOOK

Market to be flush with funds on the back of increased government spending; The spot rupee is expected to rule in the 43.45-55 range against the dollar; Yield on the 10-year benchmark may rule in a narrow 6.97-7 per cent band

MONEY MARKETS
Support from govt spending
Liquidity is expected to stay, mainly on account of government expenditure. The government, for weeks together, had strained the system off liquidity by suppressing the expenditure programme. On the other hand, it had sucked out a substantial amount through auction and advance tax outflows.

Anticipating inflationary pressure on the economy, the government's spending had taken a setback in the last few weeks. Oil prices continue to remain a cause of concern.

However, the full impact of oil price hike is not being passed down to the system by calibrating marginal hikes in domestic oil prices in a phase wise manner. Inflation rate will continue to be moderate for some more time due to base effect, said dealers.

Liquidity to set easy tone

Call rates, at which the interbank players lend and borrow funds for daily market operations, will continue to rule easy as surplus liquidity will prevail. Soft rates will prevail not only in the call market but also in the collateralised lending and borrowing obligation, an alternative money market instrument developed by the Clearing Corporation of India Ltd.

This product is meant for both banking and non-banking players unlike the call market which is exclusively for banks.

Two auctions on cards

There are two sets of treasury bills to be auctioned this week. While a 91-day T-bill will mop up Rs 2,000 crore, another Rs 1,500 crore will be sucked out by a 182-day T-bill. While the 91-day T-bill will be auctioned to garner Rs 500 crore under the government's borrowing programme, another Rs 1,500 crore forms part of the market stabilisation scheme (MSS).

Similarly, the 182-day T-bill will suck out Rs 500 crore followed by another Rs 1,000 crore towards MSS. The cut-off yields are expected to be market related.

Recap: Call rates ruled extremely soft even at 1-2 per cent following a surplus of liquidity. The reverse repo bids, which are regarded as a benchmark for assessing the surplus liquidity, have gone up to Rs 35,000-45,000 crore. Inflation for the week ended June 23 was 4.07 per cent as against 4.18 per cent the week before.

CORPORATE BONDS
No new issues expected
No major issues are expected this week. Most of the corporates are either tapping the overseas borrowing route or the loan route which are cheaper. This is because the choppiness in the government securities market has pushed up the interest rates on bonds which is set as mark up on the gilt rates.

The secondary market will track the government securities market. However, demand for corporate bonds is likely to go up. The demand will come from mutual funds and insurance companies, which have received good subscriptions, said dealers.

In fact, the demand for corporate bonds is much in excess to the supply. This is one of the reasons for lacklustre trading in the corporate bonds market as the outstanding floating stock available is limited.

Commercial papers continue to buzz with activity. Uncertainty in the long-term interest rates is prompting the corporate sector to prefer borrowing through commercial papers.

Mutual funds, on the other hand, in order to enhance their returns are preferring investing more in commercial papers which fetch a better return than just focusing on underlying treasury bills.

Recap: The corporate bonds market remained lacklustre last week as there was no major buying demand. This was mainly on account of lacklustre government securities market which acts as a benchmark for the corporate bonds.

GOVERNMENT SECURITIES
Auctions expected to sail through
The government announced a borrowing programme to raise Rs 8,000 crore through an auction by reissuing two papers "" 7.50 per cent 2034 paper for raising Rs 3,000 crore and 8.07 per cent 2017 paper for Rs 5,000 crore.

According to dealers, while the 2017 paper will be mopped up by banks and primary dealers, the 2034 stock will cater to insurance companies and trusts.

The market is expected to be flush with liquidity with an increase in the government's spending this week. The market is confident that auctions will sail through. However, the driving factor for the market is the cut-off yield at which these papers will be auctioned.

The market is, however, not encouraged by the surplus liquidity as the most worrisome factor is the valuation hit on the investment portfolio with fall in prices.

In this backdrop, the 10-year paper is expected to trade in a narrow 6.97/7 per cent band.

Recap: Even as inflation rate for the week ended July 23 was at 4.07 per cent as against 4.18 the week before and liquidity is awash, the government securities' prices fell after a short rally. This has been mainly on account of the risk on valuation of the government securities portfolio following fall in prices.

CURRENCY
Rangeound movement seen
The spot rupee is expected to stay ranged but in a bullish note. According to dealers, the euro is likely to appreciate as a technical correction.

This is because both the euro and pound have been plummeting against the dollar apprehending a slowdown in the eurozone economy. Now with the Bank of England already cutting the repo rate by 25 basis points, there should be a correction in the exchange rate, feel forex dealers.

Therefore, the bullish note in the euro and pound is also triggering a note of appreciation for the spot rupee.

On the other hand, the Reserve Bank of India will be actively managing the rupee so as to avoid either a fast depreciation or appreciation of the spot rupee.

In this backdrop, the spot rupee is expected to rule in a range of 43.45-55 per dollar, said R N Subramaniam, chief dealer, Canara Bank.

Premiums will continue to slide

Premium on dollars will continue to go down with exporters selling at every level of depreciation in the band of 43.30-50. Exporters panic as the spot rupee is expected to appreciate with hopes of further rounds of yuan revaluation. Therefore, they will try to book their receivables at every dip in the rupee-dollar exchange rate.

However, the pressure will be countered by importers who are booking near-term dollars to play safe in case of eventualities. They are staying away and not booking long-term dollars anticipating a rising rupee.

Recap: The spot rupee remained rangebound throughout the week in a 43.40-54 range. While demand for oil payments put a pressure on the rupee to depreciate, portfolio investments supported the supply side to keep the spot rupee rangebound. In the forward market, premiums came down sharply with exporters booking of receivable.