Liquidity Is A Non-Issue This Week

Funds remain more than adequate as is evident from the surplus parked under the repos mechanism of the Reserve Bank of India (RBI).

In fact, repos done with parties other than the RBI fetches a minimum 3 per cent as against 4.5 per cent offered by the RBI.

The statement made by the new RBI governor Yaga Venugopal Reddy on the continuity of monetary policy as it is gave a fillip to the market.

Net outflows of roughly Rs 4500 crore

Meantime, outflows scheduled this week tot up to Rs 7,500 crore, while inflows are of Rs 3,015 crore approximately.

 

While inflows will be primarily on account of coupon payments of various state and central government securities, Rs 1,500 crore will go out of the system through the 91-day treasury bill auction, another Rs 5,000 crore through open market operations and Rs 1,000 crore through the state government loan issue. Current liquidity is fine, but the position one or two months down the line does evoke frowns.

With the Resurgent India Bond maturing in October, around Rs 20,000 crore is expected to go out of the system so as to enable the State Bank of India to repay the bond holders.

With cash dollar in shortage after rampant disbursement of foreign currency-denominated loans, players are cautious about dollar delivery in time even though forward dollars have already been booked.

In the bonds market, a cause for worry at present is the overhang of liquidity, which used to be one of the primary drivers of gilts. This could change following the RIB redemptions.

On the flip side, players feel fresh triggers towards a cut in the interest rate will come in the ensuing busy season credit policy.

However, some participants are of the view that adequate measures have been taken to tide over the redemptions and it will pass off uneventfully.

Meanwhile, participants say forex inflows will continue to be good till such time equity returns are competitive.

Another easy week for call money

Inter-bank call money rates will rule easy with no pressure on liquidity expected this week. Players may cover up for their customary reserve requirements as this is the reporting week.

Moreover, according to players, the redemption of Resurgent India Bonds might put some pressure on funds, which, in turn, will ease the overhang of funds.

Treasury bill auction on Wednesday

A 91-day treasury bill auction is slated on Wednesday for Rs 1,500 crore. The cut-off is expected to be market-related and slightly lower than last week.

In the auction held on September 3, the RBI had announced a cut-off yield of 4.65 per cent as against 4.73 per cent announced the week before last.

In a bid to steepen the yield curve, the RBI had announced a repo rate cut, which brought down the market yield on 91-day treasury bill.

Till then, yield on the paper was ruling higher compared with long-term, thus resulting in a flat yield curve.

Since then, treasury bill yields have been going down, although the curve is yet to really steepen; players say long term yields have not fallen by much.

This has been one of the reasons for the profit booking binge seen