MSS comfort for liquidity

Liquidity and oil prices will define the market's direction; The spot rupee is expected to rule in the 46.30-46.55 band against the dollar; The benchmark ten-year paper is expected to hover in the 7.95-8.05 per cent range.

LIQUIDITY
Rs 4423 croreinflow seen

Receding liquidity has been a cause of concern for the market. Players are now taking comfort in the continuation of the market stabilisation scheme, which, in a way, is taken as a reference for better liquidity in the market.

According to dealers, in two weeks, liquidity has declined sharply from the highs of Rs 45,000 crore to around Rs 30,000 crore.

Foreign exchange inflows, which were a source of liquidity for almost two years, have since moderated. Narrowing of interest rate differential between Indian and overseas markets has left little incentive for the institutional investors.

Going forward in the current financial year, the pressure on liquidity will increase from various quarters. Credit pick-up, supply of government securities as part of the government's borrowing and raising of funds by the banks to meet additional capital requirement post Basle II regime are some factors that would put a drag on liquidity.

On the other hand, not much redemption is expected which could be good for the liquidity situation. The urge for raising funds overseas among corporates has also waned with rising Libor.

Nevertheless, banks will be raising perpetual debt and if they prefer bringing the funds to India, it might add to the domestic liquidity.

The system will witness an inflow of around Rs 4,423.21 crore as against an outflow of Rs 3,500 crore.

MONEY MARKETS
Rates to ease

That there will not be additional outflow from the system may ease pressure on interbank call rates.

The call rates are likely to rule in the 6.05-6.10 per cent range with bids submitted for the RBI's reverse repo expected to go.

This is because of the redemption of securities to the tune of Rs 4,423 crore. Reverse repo is the operation through which the RBI absorbs the additional liquidity from the system.

TREASURY BILLS
Cut-off yields may dip

The cut-off yield for the treasury bills auction is likely to move down, given the buoyancy in the government securities market. In addition to the general bullishness, the demand for t-bills will also push the yields lower.

This is because, in addition to banks, mutual funds have joined as new investors in t-bills. These fund houses are deploying money from their liquid schemes in t-bills.

There are two t-bills to be auctioned this week - 182 day worth Rs 1,500 crore and 91-day worth Rs 2,000 crore. The amount forms part of the government's borrowing programme as well as the market stabilisation scheme.

Recap: The country's wholesale price index (WPI) moved up to 4.82 per cent for the week ended August 5 as against 4.61 per cent the previous week.

GILTS
Softer inflation to aid

The government securities market will remain bullish as most of the triggers has been positive. The weakness in the US inflation data is accompanied by a similar trend in India. While the inflation has come down mostly due to the base effect, moderating commodity prices have also contributed.

Oil prices have come down to $70 per barrel from highs of $78. If the trend continues, the market sentiment will remain bullish. However, according to dealers, these factors are as much positive as negative.

Liquidity has become a concern due to the lack of government expenditure and foreign exchange inflows. Nevertheless, the continuation of MSS has accorded comfort of market players.

In this backdrop, the ten-year benchmark paper is expected to rule in the 8- 8.05 per cent range.

Recap: The weak purchase data, otherwise referred to as inflation, from the United States sparked a rally in the domestic market.

This is because acceding to dealers the data has dimmed the possibility of rate increases by the Fed in its FOMC meeting next month. In addition to this, there are no additional supply of papers this month.

CORPORATE BONDS
Banks, NBFCs line up floats

Banks and non-banking finance companies are queuing up their issues to tap the debt market for funds. State Bank of India announced its plans to raise around Rs 5,000 crore through rupee innovative instruments, including tier II, upper tier II, hybrid instruments and perpetual debt. This is in addition to its plan to raise around $200 million.

Another category of issuer in the corporate debt market is the public sector undertakings. Most of them are panning to raise money both in the overseas and debt markets.

The upgrading of the India outlook to investment grade by Moody's is also helping the corporates to tap the overseas markets.

In the secondary market, banks are primarily targeting provident funds for such investments . Mutual funds, on the hand, have been investing in the commercial papers and certificate of deposits to deploy money flown into their liquid schemes. They are also targeting the one- to three-year papers.

Recap: The spread between the 10-year government security and triple-A bond of the corresponding maturity has narrowed to 90 basis points as against 100 bps earlier.

This is because the rally in the 10-year gilt this time was also followed by a slight rally in the prices of corporate bonds. This is owing to the investments from liquid schemes of mutual funds in the corporate bonds.

RUPEE
Upward bias seen

The spot rupee is likely to rule with an upward bias. The trigger is the interest rate increase in China which fuelled the hope that the yen may also appreciate. It could be mentioned that the yen is often treated as proxy for the yuan, said dealers. These developments have put all Asian currencies, including rupee, on an appreciation mode.

The bias is strong enough even to counter the negative impact of the high trade deficit reported by Indian economy last week, said a market dealer.

The country's trade deficit this year has widened to $16.72 billion from $14.38 billion last year . However, most of the market has discounted the impact since the import bill has gone up primarily on account of oil.

The oil price, however, has subsided to $70 per barrel as against gigs of $78 earlier. This will help the spot rupee to remain firm. However, there will be pressure on forward dollars.

In an attempt to buy dollars by taking advantage of the dollar depreciation against the rupee, banks are pushing up the cost of Indian rupee.

This is, in turn, inching up the forward premiums. In this backdrop, the spot rupee may move in the 46.30-46.55 against the dollar.

Recap: The spot rupee remained rangebound in 46-46.44 against the dollar after the greenback started depreciating. The buoyancy continued with an increase in the foreign exchange inflows to the equity market.

The dollar's depreciation continued further with weak inflation data from the United States. The forward premiums, however, remained firm with dollar buying by oil companies. The dollar demand was mostly met by dollar sales by corporate.