Funds in surplus on RBI intervention

Liquidity: In abundance

The rupee liquidity is expected to remain comfortable on the back of heavy intervention of the Reserve Bank of India (RBI). The intervention is aimed at stemming a sharp appreciation of the rupee. The rupee is gaining against the dollar following heavy foreign exchange inflows into the domestic equity market.

The purchase of dollars by the RBI will release rupees into the market. Post-Fed rate cut, equity markets in the emerging economies, including India, are receiving heavy forex inflows. This will be aided by the panic sale of dollars by exporters to reduce the loss of value of the dollar against the rupee.

However, the RBI has already issued bonds and bills to absorb excess liquidity. In addition to this, funds absorbed through advance tax outflows will also make their way into the market in the form of government expenditure.

Call rates: Seen softening

Call rates may soften on the back of comfortable liquidity. It may inch up during the week before the auction since banks will be cautious in lending. Market players will also prepare for the reporting Friday, when banks have to set aside funds with the RBI as a proportion of the deposits mobilised under the CRR requirements. Towards the end of the week, once the government expenditure starts, liquidity may improve and call rates may head south.

Treasury bills: Auctions on cards

The RBI will auction the 91-day and 182-day treasury bills for a notified amount of Rs 3,500 crore (Rs 3,000 crore for the MSS) and Rs 2,500 crore (Rs 2,000 crore for the MSS). The cut-off yield on the T-bills is expected to come down this week following improved liquidity. There will be brisk trading interest from banks and institutions since banks will try to play safe with the investment portfolio before the October credit policy. Moreover, trading portfolio in treasury bills do not attract market valuation.

Corporate bonds: Tier-II issues likely

The market may witness a host of tier-II bond issues from banks to raise long-term funds to take advantage of surplus availability of funds and lowering of yields. This will be primarily on expectation of softening of yields in government securities. The yield on the ten-year bonds may come down from the highs of 9.90/9.95 per cent to 9.75 /9.80 per cent.

Banks that are expected to hit the market include associates of State Bank of India, Punjab National Bank, among others and Power Finance Corporation, Housing Development Finance Corporation, Infrastructure Development and Finance Corporation among public sector undertakings.

G-sec: May see brisk trade

Since the quarter has come to an end along with the valuation concerns of the market portfolio, the government securities market may witness fresh buying demand. Dealers said the demand for investments would also arise from banks that are not finding adequate lending opportunities.

The demand will primarily arise for securities in the shorter- and medium-term papers as most of the new supply of papers is in these segments.

The RBI will be auctioning two dated securities "" 5.87 per cent 2010 for Rs 4,000 crore and 11.30 per cent 2010 for Rs 3,000 crore "" next week under the Market Stabilisation Scheme (MSS) to absorb excess liquidity.

Rupee: Set to head north

Inflows into the domestic equity market will be complemented by heavy selling of dollars by exporters. Both these factors will help in the appreciation of the rupee against the dollar. Globally, the dollar may remain strong for a while since both the rupee and the pound are expected to undergo some correction since both have tested new highs against the dollar. The euro reached $1.4197, while the pound tested $2.0350. However, after the correction, the cross currencies will continue on their appreciation spree since the overall sentiment on the dollar is bearish.

However, inflows will be countered through aggressive intervention by the RBI to stem the rupee appreciation. Demand from importers may also surge since the crude oil prices have already touched a high of $82.63 a barrel.

In this backdrop, the spot rupee is expected to rule in the range of 39.50-40.00 to a dollar.

Besides oil payments, companies which borrowed funds through the external commercial borrowings route, will also cover their dollar payments.

According to the official view of Calyon Bank, the rupee by the end of the calendar year should move down to 42 to a dollar given the large-scale profit-taking in the equity market and political uncertainty.

Post-Fed rate cut, the interest rate differential between India and the US has widened and the dollar has been depreciating. This will ease the rupee premia to be paid for booking forward dollars.