Liquidity Seen To Have Evaporated Temporarily

unds in the banking system has come down and excess cash temporarily used up by the market participants. This follows the delayed announcement of the scheduled government auction of gilts.

The liquidity is, however, not expected come down further; at worst, it shall be enough to meet the needs.

Any action taken or signal sent out by the Reserve Bank of India (RBI) will decide the trend this week. Government security prices are expected to remain rangebound unless the RBI undertakes some open market operation.

The average daily inflow into repos was at Rs 7,590 crore last week, which indicates an OMO is unlikely this week. There has been little excess liquidity in the last couple of days of last week. On Friday the repo inflow was just Rs 1,035 crore.

 

In the last week of December, the 14-day repo sucked out just Rs 1,070 crore from the system, which will be brought back in this week. The conversion of ad-hoc treasury bills amounting to Rs 20,000 crore into dated paper by the RBI has sent alarm bells on the possibility of the central bank coming out with an open market operation auction.

The fact that the central bank has not done so seems to hint that it is comfortable with present low yields.

Net inflow of Rs 880 crore

The market will witness net inflow to the tune of about Rs 880 crore. The known inflows for the week amount to Rs 1,880 crore, against an outflow of Rs 1,000 crore for the 91-day treasury bill.

The main inflow is the redemption of a 91-day bill worth Rs 750 crore and the balance through interest from government and state government papers. There will also be a Rs 1,000 crore 91-day bill auction during the week.

Call rates to remain range-bound

Overnight call money rates will continue to remain tightly ranged at 5.45 to 5.6 per cent levels on the back of adequate liquidity. Participants anticipate call to be around the repo rate, as the RBI has been accepting all the bids in the daily repo market. Rare deals are expected to take place at 5.4 per cent levels.

After slump, treasuries to remain grooved

After the dramatic drop in treasury bill cut-off yields last week owing to lack of interest in short-term paper, yields are expected to remain rangebound this week. Last week, cut-off yield on the 91-day paper dropped by four basis points, while that on the 364-day issue fell by 11 basis points. Players do not expect much change in the yields from the current levels.

Yields on the shorter paper are not attracting buying interest as participants do not expect a repo rate cut in the near future. The 91-day bill is expected to remain at 5.37-40 per cent levels.

Action on all fronts will largely depend on the moves made by the central bank, be it to suck out liquidity through open market operations or inject the same through reverse repo or by opening up the open market operations window to buy securities from the market.