Liquidity to improve on govt expenditure, lower oil prices

WEEKLY MONEY & CURRENCIES

Liquidity: May ease

The liquidity situation is likely to improve this week, with the government’s compensation for farm loan waiver to banks triggering cash flow into the market. However, there is a rider as the government can compensatie the banks only after getting the parliamentary approval.

As banks enter the second week of the reporting fortnight, their cash reserve ratio (CRR) requirements are set to ease. With crude oil prices falling, it is a positive trigger for the equity market. Taking a cue from global markets, the local equity markets may also receive foreign exchange inflow.

According to dealers, even if RBI may immediately issue the Market Stabilisation Scheme (MSS) bonds and treasury bills to suck out the rupee liquidity as a result of the forex inflow, surplus liquidity in itself is a great comfort for the market.

 

Call: In comfort zone

Call rates are likely to rule in a comfortable range of 8-9 per cent as the liquidity is expected to improve. Funds infused by RBI under the repo route have come down substantially from a high of Rs 40,000-50,000 crore to Rs 15,000-20,000 crore. Dealers expect surplus funds into the system if the government expenditure starts.

However, a tight liquidity condition is likely to continue till the market receives funds in the form of government expenditure. This is because banks will be preparing for loans to meet demand in the festival season and also gearing up for advance taxes.

G-sec: Upbeat mood

Deposits have been consistently growing for banks and RBI norms require government securities (G-sec) to be maintained as a proportion of the deposits, which is otherwise known as the statutory liquidity ratio (SLR). Besides, credit has not been growing as fast as deposits and the credit- deposit ratio has been ruling stagnant around 72-73 per cent. According to dealers, since the credit growth has been modest, the next best opportunity for banks to earn profit is through investments. Therefore the trading interest in government paper is likely to improve in coming days.

The outlook will remain bullish if crude oil prices continue to fall.

Rupee: Hinges on oil

Crude oil prices remain a strong factor for the movement of the spot rupee. According to dealers, if crude oil prices continue to fall and the equity market sentiment improves, the spot rupee may appreciate. Equity market movements, in turn, are dependent on the dollar movement, which, however, has been ruling very strong globally. In the domestic market, exporters and importers will wait for the spot rupee-dollar movement. If the rupee continue to appreciate, exporters will sell dollars, albeit for the near term receivables of one or two month. Importers will also rush to cover their import requirements for the near term.

In this backdrop, the spot rupee is expected to rule in a wide range of 41.80-42.40 to a dollar.