Likely steps against inflation haunt mkt

WEEKLY MONEY & CURRENCIES

Liquidity: Better times
Liquidity is expected to improve as financial year-end worries of banks to set aside funds will come to an end.

Even if the market is hopeful of the government expenditure, a section of the finance ministry is of the view that the cash balance of the government with the Reserve Bank of India (RBI) may remain intact to cut down expenditure and curb inflationary expectation.

For the week ended March 21, the central government's cash balance with RBI was Rs 82,227 crore, an increase of Rs 35,986 crore over the last week's figure.

Fresh inflows from foreign investors may take a backseat even this week since the finance minister has indicated a possible compromise on growth to curtail inflation in response to the higher Wholesale Price Index (WPI) data last Friday. The system will witness an inflow of Rs 1,698 crore through coupon redemption as against an outflow of Rs 1,000 crore.

T-bills: Yields seen low
RBI does not plan to issue any further treasury bills under MSS since it will add the interest burden on the government at a time when it is fighting to show a clean fiscal balance.

Therefore, this week, like the previous four weeks, RBI will issue T-bills only for government borrowing. The 91- and 364-day T-bills will be issued at a notified amount of Rs 500 crore each.

G-sec: Bearish mood
The government securities (G-sec) market may reel under the bearish sentiment with the only succour being an expected spurt in the government expenditure. If yields drop sharply, banks will pick up gilts for value-buying at cheaper prices.

In this backdrop, the yield on the ten-year benchmark paper may rule in the range of 7.85 to 8 per cent. However, dealers sound confident that the ten-year benchmark may not breach 8 per cent even when the buying may not be aggressive.

Rupee: Likely to drop
The spot rupee is likely to rule subdued with a bias towards depreciation, though movements will be range-bound. Fresh inflows will have to wait as foreign investors are taking time to bring in proceeds into the domestic market as they feel the global markets crisis will take some time before stabilising.

Demand for dollars will be subdued as most of the companies have overbought dollars for covering payments. While demand and supply will be critical factors for the rupee movement, another important criterion will be the outlook in the non-deliverable forward (NDF) market.

Since inflation is high and there is a lurking fear that RBI may take monetary measures to control liquidity, the cost of rupees may go up. This may keep the rupee premia for forward dollars firm. In this backdrop, the spot rupee is expected to rule in the range of 39.80-40.10 to a dollar.