Liquidity jitters to continue; Re to stay strong

WEEKLY MONEY & CURRENCIES

The liquidity in the market continues to remain a problem this week as well. "Till the meltdown in the global equity market settles down , the status of liquidity will be difficult to assess", said a banker.

The US Federal reserve has cut the primary credit discount rate and this may stop global fund houses and foreign banks from liquidating riskier assets in emerging markets and generate dollar liquidity for a while.

However, this may not be a permanent solution as the full implications of the defaults in the subprime lending market is yet to unravel. Till that time, outflows from the equity markets will keep the market on tenterhooks, said a dealer.

On the other hand, if yen continues to appreciate, market players in global markets, including India, may unwind yen positions in various emerging economies in favour of dollars to avoid rising yen interest rates.

This may also lead to outflows from Indian markets as was seen last week. Coupled with forex outflows, government expenditure has also come to a halt and the government is, in fact, in a borrowing mode.

However if the global markets recover or institutional investors re-enter Indian markets at lower levels, the market may witness some inflows and liquidity situation will bolster.

At present the market is just adequate with net liquidity of around Rs 20,000-25,000 crore after an outflow of Rs 10,000 core through auctions.

Call: Rates to head north

Interbank call rates - the interest rate charged by a bank to another for lending funds "" is expected to go up this week. While forex outflows from equity market will act as a deterrent to liquidity, the market will also factor in fund flow towards auction even if it scheduled towards the end of the week.

Corporate bonds: Short-term rates to rise

Most primary issuers will prefer to wait till the market volatility subsides and interest rate stabilises. The immediate fund requirements will be met through short-term commercial papers and certificate of deposits.

According to dealers, the interest rates both for short- and long-term corporate bonds will rise. While concerns on liquidity will push up short term rates, the spread for the long term bonds will rise following widening spread for Indian papers overseas.

"The Indian institutions subscribing to these papers will also factor in the risks arising from the exposure of the corporate or bank to international market, said a head of treasury in PSU bank.

Rupee: Inflows key to trend

The spot rupee is expected to open stronger on Tuesday following the recovery of global markets last week post discount rate cut by the US Federal Reserve. However, this will depend on recovery on Indian equity markets which are also likely to rebound.

According to dealers, the cut in the discount rate has made finance cheaper in the US and this may prevent funds active in emerging markets from generating dollar by liquidating riskier assets.

Besides global markets, the rupee will be a function of yen movements. If the yen appreciates to dollar further, market players will engage in unwinding yen positions into dollars to avoid an increase in yen interest rates, said a dealer.

Even if the market is hopeful of foreign exchange to flow into the country , but it will take a while. Dealers are of the view that the funds will come back since returns are attractive in India, more so after the rate cut in the US.