Low FII flow set to tighten funds further

WEEKLY MONEY & CURRENCIES

Liquidity: Costly global borrowings
Liquidity will continue to be tight both in the foreign exchange and money markets.

Overseas borrowing has become expensive for banks as spreads over the London inter-bank offered rate (Libor "" the international interest rate benchmark) have widened from 10-15 basis points to 150-200 basis points.

Foreign institutional investors (FIIs) are busy booking profit in the equity market and no fresh FII inflow can be expected until the Union Budget, say dealers.

Call rates: May stay firm
Call rates, at which banks lend and borrow funds from each other, are likely to rule firm as liquidity continues to remain tight. Banks will be setting aside funds for provisioning towards the end of the financial year. Moreover, advance taxes for the fourth quarter will have to be paid on March 15.

Treasury bills: Yields up
Given the concerns over liquidity, cut-off yields in the auction of treasury bills may continue to firm up.

RBI will be auctioning the 91- and 364-day treasury bills for Rs 500 crore and Rs 1,000 crore respectively, only towards the government's borrowing programme. There are no issues for the Market Stabilisation Scheme (MSS), which is meant to suck out excess liquidity from the system.

G-sec: Sell-off likely
The government securities (G-sec) market will continue to rule with a bearish sentiment, primarily due to concern on liquidity. However, the purchase window opened by RBI to infuse liquidity through open-market operations (OMO) may cheer the market a bit.

Under the OMO, RBI will purchase loan paper of the Orissa government and, in return, infuse the rupee liquidity to the tune of Rs 700 crore into the market.

Dealers said most of the banks might sell government securities to generate the rupee liquidity. Moreover, many banks have made an excess purchase of government securities prior to the monetary policy review expecting a rate cut. The benchmark ten-year paper will move in a range of 7.65-7.70 per cent.

Rupee: May decline
The spot rupee-dollar exchange rate will remain range-bound with a bias towards depreciation.

According to dealers, even if the long-term outlook on the rupee remains bullish, the sentiment in the near term is bearish as dollars are in short supply. In the domestic market, dollars are available in the foreign exchange reserves of RBI.

FIIs, who act as portfolio (short-term) investors in the Indian equity market, will wait for cues from the Budget.

In this backdrop, the rupee-dollar rate is expected to rule in the range of 39.80-40.25 to a dollar.

Exporters are also likely to start selling dollars above 40 and this will help in the dollar supply.

On the other hand, there will demand from importers to cover the month-end requirements. Another trigger will be global cues on the dollar, which follow a string of economic data to be released in the United states.