Outflows not to hit liquidity

LIQUIDITY
No negative triggers

Surplus liquidity has become key to the market. At present, there are no negative triggers. Crude prices seem to have stabilised for the time being, with the US preparing to tap the strategic oil reserves.

Inflows will be around Rs 1,751 crore, whereas outflows work out to be around Rs 6,000 crore. Outflows are predominantly on account of advance tax roughly estimated at Rs 10,000 crore.

Inflation is likely to firm up a bit in three weeks after the index factors in the effect of the oil price hike. However, with the base effect, the inflation rate might still remain moderate, said analysts.

Calls to stay easy

Call rates "" rates at which banks lend and borrow funds for daily requirement "" are likely to rule easy backed by surplus liquidity. Even if advance outflow on account of tax payments start this week, liquidity is in excess to meet the requirement. Call rates are seen in the 5.05/10 per cent range.

2 auctions this week

There are two sets of treasury bills to be auctioned this week. The 91-day t-bill will be auctioned for Rs 3,500-4,000 crore towards the market stabilisation scheme and the rest towards the government's borrowing.

The 364-day t-bill this week will absorb Rs 2,000 crore from the system - Rs 1,000 crore each towards the government borrowing and MSS.

Trading by mutual funds to park surplus funds mopped up through subscription towards various schemes may drive the cut-off yield on the 91-day t-bill lower.

CORPORATE BONDS
Fresh floats seen

The market will remain active as various banks and oil companies have lined up bond issues. Moreover, oil bonds have been issued to oil companies to offset their under-recoveries. These bonds will carry a coupon rate of 7 per cent for 7 years.

According to dealers, the secondary market will lap up these bonds as ten-year paper is getting traded at 7.05-06 per cent. Moreover, these bonds carry government guarantee also.

With the increase in the floating stock of bonds, the trading in the secondary market is likely to go up.

In short-term instruments for raising money, both commercial papers and mibor-linked non-convertible debentures (NCDs) have become popular.

While CPs offer the advantage of roll-over of the same loan, NCDs give opportunity to the issuer to opt for floating rates since the interest rate is spread over the one-year government security or treasury bills.

GOVERNMENT SECURITY
Correction ahead

The government security market is poised comfortably. There are no negative triggers as oil prices have moderated. The government's borrowing programme for the first half of the current financial year is over.

Even though, outflows towards advance tax are seen, liquidity is abundant. According to dealers, the first half of the week may see a correction leading to a fall in gilt prices.

Subsequently, banks might pick up paper at lower prices for valuation gain going towards the second quarter. To this backdrop, the ten-year paper is likely to rule in the 7.02-7.05 per cent range.

CURRENCY
Inflows to prop Re

The spot rupee is expected to rule in between 43.75 and 43.95 against the dollar. "The short-term outlook for the local currency is bearish whereas in the medium term, it is poised to appreciate," said dealers. Oil prices have stabilised after the US decided to tap its strategic oil reserves.

Recent US data also do not support robust economic recovery and this has led the dollar to lose globally against major currencies. On the other hand, if the domestic equity market enters a correction phase, this might pressure the spot rupee to depreciate.

However, dealers expect foreign exchange inflows to continue this week which are expected to prop up the rupee.

While wide movements in the spot rupee will be guarded by the RBI, importers may go for covering near-term positions with every level of depreciation in the spot rupee-dollar exchange rate.

Forward premiums

The premiums on forward dollars are likely to remain ranged with an upward bias. If the rupee depreciates, importers might buy dollars to cover their positions.

Fundamentally, the market feels that in the forthcoming Federal Open Market Committee (FOMC) meeting, the Fed might not raise the interest rates.

Thus, forward premiums, which primarily reflect the interest rate differential between interest rates in the US and India, may not come under pressure.

On the other hand, if oil prices move up or the dollar globally appreciates against all other major currencies or demand for the greenback goes up in the Indian forex market following a correction in the equity market, forward premiums might come under pressure and shoot up.

However, if the demand for spot dollars exceeds forward dollars, near-term premiums may crash and go for a discount.

Recap: The spot rupee remained rangebound in 43.78-88 against the dollar. The foreign exchange market remained lacklustre as the pressure from the non-deliverable forward market eased with dollar losing against all major currencies globally.

The premiums on the forward dollars also ruled comfortable as the market witnessed dollar sales.