Funds crunch to haunt market; Re may dip

WEEKLY MONEY & CURRENCIES

Liquidity: May be tight
Liquidity is expected to be tight this week as outflows far exceed inflows in the system. The tight liquidity was reflected last week, when the Reserve Bank of India (RBI) had to inject around Rs 30,000 crore into the system, which is the highest amount to be infused in a single day in the current financial year.

Contrary to market expectations, RBI announced the dated security auction of Rs 7,000 crore besides the regular treasury bills sale, albeit for a smaller amount. Over and above these, there are payments towards excise duty by the corporate sector.

Foreign exchange inflows are likely to be highly moderated since portfolio investors in the foreign exchange market are busy booking profits for the calendar year-end.

Call rates: May firm up
Call rates are expected to rule firm, with outflows exceeding inflows and the market reeling under extreme liquidity tightness. Banks will be cautious in lending in the beginning of the week, when there will be pressure to set aside funds for the reporting fortnight ending November 23. Requirement of funds for CRR will coincide with outflows towards the government securities and treasury bills auction.

Treasury bills: Yields may head north
RBI will auction the 91- and 364-day treasury bills for a notified amount of Rs 2,000 crore each. RBI has scaled down the usual amount from Rs 3,500 crore and Rs 3,000 respectively, owing to tight liquidity conditions.

Since the liquidity is tight, it will reflect through higher cut-off yields in the auction of T- bills, according to a dealer.

Corporate bonds: Issues afoot
Since the underlying sentiment in the medium term is bullish for the market, many public sector undertakings are planning to issue 5-10 years' bonds to raise funds.

Since the yield curve is flat in government securities, the appetite is more for short-term government papers, which give a higher yield for less volatility in prices in uncertain conditions. Therefore, long-term investors prefer to invest in long-term, non-SLR papers, which give a higher interest rate differential.

G-sec: Lacklustre trade
Liquidity remains the primary concern for the market. Banks will thus not be enthusiastic for trading in government securities. RBI has announced the dated securities auction of Rs 7,000 crore besides the regular treasury bills sale.

This will mar the sentiment in the market, according to a dealer. There is demand for government papers in the longer end of the maturity, but yields are not coming down since the short-term rates are very high.

Re: Downward bias
The rupee is likely to remain rangebound with a bias towards depreciation. But on the other hand, exporters' sale of dollars may lift the rupee.

Bankers are of the view that the equity market may undergo bouts of correction from the current levels. The foreign exchange inflows into the Indian equity market, which has been a prime mover of the rupee-dollar exchange rate till date, may rest for a while.

While funds are booking for the calendar year-end, globally markets re-correcting, following the sub-prime losses filed by foreign banks. "" Anindita dey

While the dollar is losing on account of weak economic data, it is further likely to depreciate if the results on the housing data to be realised this week are weak according to the market expectation.

On the other hand, minutes of the policy meeting of the Bank of England will be released this week, which hint at a rate cut in the next meeting, according to a dealer.

RBI will continue to support the rupee around 39.30 and this may result in continuous intervention by the central bank through the purchase of dollars.

In this backdrop, the rupee may rule in a range of 39.10-39.60 to a dollar.

Post-script
RBI injected around 30,000 crore in a single day on Friday, the highest quantum in the current financial year, to tide over the liquidity crunch.