Liquidity remains in surplus

MONEY MARKETS

Even though foreign capital inflows have taken a back seat following profit-taking by global funds, the banking system is reeling under surplus liquidity owing to the earlier inflows.

India continues to be one of the favourite destinations for global funds and incremental foreign capital inflows are continuing, albeit in limited quantities.

The RBI has also not been taking an active part in the markets for over two weeks now. Therefore, the dollars bought and sold by banks is generating excess liquidity.

Inflation continues to be a cause for concern. With oil prices remaining strong at $50, the level is increasingly being taken as the base for global oil prices. The full impact of the rise in international oil prices is yet to percolate to the retail level in India. This keeps the upward bias in the inflationary expectations rife.

Rumours of China's revaluation of the yuan are fast losing steam. Global players have already started reversing their earlier positions where they had sold dollars to all other major Asian currencies expecting a revaluation in the yuan.

Given these background, dealers expect a surge in liquidity. However, the outlook for the forex and bonds market is bearish.

Call seen in 4.9-5.0% range

There will be an inflow of around Rs 2855 crore this week towards coupon redemption and maturity of government papers.

On the other hand, outflows are likely to be at Rs 12,000 crore. While there will be an outflow of Rs 4000 crore towards auction of treasury bills, the government is likely to announce borrowing for the state development loan at Rs 8000 crore.

Given the liquidity in the banking system, call rates are expected to rule in the 4.90-5.00 per cent range.

Treasury bills

There are two sets of treasury bill auctions proposed this week. Both 91-day and 364-day T-bills will be auctioned for Rs 2000 crore each.

The yields at the auctions are expected to be market-related, and thus a bit on the higher side following the upward bias in short-term rates after the hike in the reverse repo rate.

Recap: The cut-off rate in the 91-day treasury bill auctioned last week was at 5.18 per cent, as against 5.10 per cent in the week before.