Euro-dollar moves to steer rupee

Cut-off yield at gilt auction and foreign exchange inflows are crucial for the market; The ten-year benchmark gilt is expected to rule in the range of 7.30-40 per cent; The spot rupee is likely to move within a band of 45-45.30 to the dollar.

LIQUIDITY
Easy liquidity condition prevailing

Ample liquidity in the system is expected to continue through redemption of government papers and foreign exchange inflows. This is likely to be the major driver of market sentiment since the decision of the Reserve Bank of India to defer the reverse repo rate hike in the annual policy has allayed other fears for the time being.

In the annual policy, RBI has maintained a hawkish tone as external factors such as oil prices and surge in retail credit in the domestic market weigh heavy on the policy maker.

It is noteworthy that the liquidity has been pushing down the yields in the short term where the trading interest is confined. Foreign exchange inflows is expected to continue with the same fervour given the buoyancy of the Indian equity market.

With the euro strengthening against the dollar, the spot rupee will fast appreciate against the greenback in line with the euro and pound.

In this scenario, the market expected the RBI to intervene to reign in rupee appreciation once it reaches 45 level, said a dealer. With this intervention, dollar buying may result in the infusion of fresh rupee liquidity in the market.

The market will witness a net outflow of Rs 1,500 crore through treasury-bill auction as against an inflow of Rs 1,183.97 crore through maturing t- bills and coupon redemption.

CALL RATES
CBLO rates to rule soft

The interbank call rate is likely to mellow down with comfortable liquidity position. Rates on the collateral borrowing and lending obligations (CBLO) is also expected to rule soft.

In fact, the one-day CBLO, where the funds are borrowed after pledging gilts, is ruling below 5 per cent. According to players, some banks are borrowing funds at CBLO and lending in the call market to earn an arbitrage of 40-50 basis points. However, all borrowers could not access CBLO due to shortage of gilts in their portfolio.

TREASURY BILLS
Yield on 91-day t-bill to slip further

The 91-day and 364-day treasury bills are slated to be auctioned for Rs 500 crore and Rs 1,000 crore, respectively. The yield on the 91-day t-bill is expected to come down further at the auction driven by ample liquidity. It had already reached around 5.40 per cent, 10 basis point below reverse repo rate of 5.5 per cent in the last auction.

The secondary market is also likely to experience a lot of trading activity by foreign banks and private sector banks who are accumulating short-term securities so as to borrow funds in case they need liquidity. They are avoiding long-term papers for fear of booking losses once the yields go up.

CORPORATE BONDS
Bank floats on cards

The corporate bond market is set for good trading activity this week. A few public sector banks are expected to tap the market with Tier II bonds as the spread between the 10-year triple A bonds and corresponding government security has started narrowing down.

Besides, foreign banks on behalf of their FII clients have started buying bonds. In the primary issues as well, the market is witnessing bilateral deals with PSU banks and foreign banks.

Another boost to the corporate bond market has been falling yields of their benchmark government securities. This follows the RBI's decision not to hike the reverse repo rate. Reverse repo is the rate at which the RBI absorbs liquidity from the market under its liquidity adjustment facility.

The action in the secondary market will be seen mostly in short-term instruments such as commercial papers and certificate of deposits. This is evident from the fact that heavy trading has been pushing down the yields on CDs and CPs from a high of 9-9.5 per cent to 7.40-7.65 per cent.

Commercial papers, at the same time continue to remain the favourite instrument of corporates to raise short-term funds till the time long-term borrowing plans hit the market.

According to bank dealers, traditional route of normal cash credit has once again emerged as the common form of funding for corporates. This is because, most of the banks have called back fancy structure of loans linked to daily benchmark such as Mumbai interbank bid-offer rate etc.

Recap: The spread between the ten-year government security and triple A corporate bond fell to 90 basis points. For the week ended March 31, 2128 CPs were issued for a total amount of Rs 12,767 crore and a total number of 3442 CDs were floated by banks to raise Rs 36,931 crore as on March 17.

GOVERNMENT SECURITIES
Bullishness seen ahead

The market is bullish after the expected hike in the reverse repo rate has been shelved by the RBI in the annual policy announced last week.

This bullishness will be further aided by ample liquidity, but dealers said that it will mostly drive down the yields in the short end of maturity. The outlook is cautious on the long-term papers as the extent of booking losses is much more at the longer end of the maturity.

The crude oil prices crossing $70 per barrel remains a cause of concern. Another trigger for the market will be the cut-off yield at which the two government stocks will be cleared at the auction to be held next week.

The government will be raising Rs 10,000 crore through the resale of the 7.40 per cent 2012 paper for Rs 6,000 crore and 7.95 per cent 2023 for Rs 4,000 crore. In this backdrop, the yield on the ten-year benchmark is expected to rule in the range of 7.40-50 per cent.

CURRENCY
May gain against the dollar

The spot rupee exchange rate is contingent upon the euro movement globally, which has been gaining against the dollar since last week. Oil prices are another concern which might lead to a depreciation in the dollar exchange rate.

As a cross-currency effect, the spot rupee appreciates with rise of euro and pound exchange rates. In this scenario, the spot rupee may move up against dollar and the upward movement will be further aided by institutional inflows.

Dealers, said that even if there will be correction in the Indian equity market, the players will re-enter the market at lower levels. Therefore, the dollar flow will continue for some time.

However once the dollar breaches the 45-level upward, the RBI is likely to intervene to prevent sharp appreciation by buying dollars from the market. The premium on forward dollars is likely to further fall this week on the back of adequate liquidity.

The fall in the forward premium will be more noticeable in the near term of one and three-month period. In this backdrop, the spot rupee is expected to rule in the range of 45-45.30 to a dollar.

Recap: The spot rupee ruled rangebound between 45.08-13 to a dollar and the appreciation started with the euro moving up against the major global currencies.

Forward premiums fell with liquidity ceasing to be a problem and sentiment in the domestic rupee market remaining bullish.