Pressure likely on rupee, liquidity

OUTLOOK

Calls may come under pressure because of auction outflows; Yield on the benchmark paper is likely to be in the 7.05-7.20 per cent band; The rupee may touch 46.30 on the back of strong dollar overseas.

MONEY MARKETS
IMD redemption pressure seen

Liquidity is likely to be under pressure in short term on account of redemption of India millennium deposits (IMD), advance tax payments and public offerings of equity, traders said. The Reserve Bank of India (RBI) has become proactive by taking steps to maintain comfortable liquidity.

The apex bank cancelled treasury bill auctions under the market stabilisation scheme (MSS) and has also opened a second window for liquidity adjustment, which remains open for 45 minutes in the afternoon.

Dealers expect another 25 basis points increase in the US Fed Rate as the Federal Open Markets Committee (FOMC) is slated to meet on December 13. It is broadly expected that the Fed will continue hiking the rate till it hits 4.5 per cent or 4.75 per cent.

RBI has announced auction of 364-day treasury bills for a notified amount of Rs 1,000 crore. Taking into account "all relevant factors", the bank has cancelled auction of 364-day treasury bills for Rs 1,000 crore and 91-day treasury bills for Rs 1,500 crore, scheduled for December 7 under the quarterly indicative schedule of MSS.

This implies that Rs 4,500 crore will be released into the system as 91-day t-bills worth Rs 3,500 crore and 364-day t-bills worth Rs 1,000 crore will redeem on December 9.

Recap: The second LAF window began operations on November 28. It is functional between 3.00 pm and 3.45 pm. It is expected to be in the nature of a residual facility for fine-tuning the management of liquidity in the system.

Calls seen at 5.25%

Traders believe that given the current liquidity scenario, call rates will continue to hover around 5.25 per cent this week. Introduction of SLAF is expected to solve a few temporary liquidity issues.

The banking system would witness outflows towards the end of this month due to redemption of IMD. Traders said the apex bank is likely to inject liquidity in order to maintain the calls at normal levels.

Recap: The RBI absorbed Rs 15,000 crore at the SLAF window and Rs 23,000 crore at the usual LAF window last week. Call rates moved in the 5.20-5.40 per cent band and closed the week at 5.35 per cent level. Inter-bank call rates normalised by the end of the fortnight, as liquidity was back in the system.

Weighted average borrowing rate in the call market last fortnight was 5.63 per cent as against 5.83 per cent in the previous fortnight. The average quantum of applications for reverse repo was Rs 3,031 crore this fortnight as against Rs 4,988 crore in the previous fortnight. This is the net quantum per day, i.e. reverse repo minus repo.

Inflation likely to touch 5.5%

Dealers expect the headline inflation number to near the 5.5 per cent mark by the month-end or by mid-January. But overall for the year as a whole, inflation is on an upward trajectory.

The fall in oil prices to below $60 a barrel is a comfort factor as domestic fuel prices are not expected to be raised. But prices of primary articles have been rising and the trend could continue for some more time.

CORPORATE BONDS
Spreads to rise

Dealers expect the spreads in the corporate debt market to continue the rise due to lack of interest among participants. With corporate borrowing having risen across the board, banks would rather lend at higher rates than purchasing papers, said a dealer with a private sector bank.

Recap: Last week, the State Bank of India received Rs 1,300 crore worth bids for its subordinated bond issue, while Cholamandalam raised Rs 100 crore via issue of commercial paper. The Food Corporation of India (FCI) mopped up Rs 5,000 crore and Welspun Gujarat raised $75 million in convertibles.

GILTS
Rs 8,000 crore outflow seen

The government bond market looks stable, in spite of the fact that inflation is going to rise from now on. Crude prices are moving in a range but any unpleasant surprise will have a bearing on the market, say dealers. Yield on the benchmark paper, which has largely been illiquid last week, is likely to be in the range of 7.05 per cent to 7.20 per cent.

The crucial factor, however, is the system's ability to cope with large outflows. Although adequate funds are available, there could be a cash-tight situation towards the month-end on account of IMD redemption, advance tax payments and equity issues.

In anticipation of this situation, the central bank has cancelled t-bill auctions. It has also started a second liquidity adjustment facility window, which is open for 45 minutes in the afternoon. Once again, the apex bank has cancelled the auction of 91-day and 364-day treasury bills.

Even as the banking system witnessed good cash flow last week, RBI has called off the MSS component of the auction. Dealers view this as a precautionary measure ahead of an expected Rs 8,000 crore outflow on account of gilt auction on Tuesday. RBI is expected to auction the 8.07 per cent 2017 government stock for Rs 5,000 crore and 7.40 per cent 2035 paper for Rs 3,000 crore.

Recap: The government securities market remained rangebound anticipating the auction announcement by RBI. The benchmark 7.38 per cent government paper maturing in 2015 ended untraded with its yield hovering around 7.08 per cent. In the actively traded segment, yield on the 7.49 per cent 2017 paper ended at 7.23 per cent on Friday compared with Monday's close of 7.21 per cent.

CURRENCY MARKET
Re may hit 46.30

The rupee is expected to weaken further this week despite steady gains in the equity market. The primary reason is the sustained rise of the dollar in the overseas markets. A dealer said, "Despite ECB increasing the rates to 2.25 per cent, the euro did not rally against the dollar. There is no reason now for the dollar to depreciate from the current levels."

The rupee is expected to trade in the 46-46.30 range taking cue from the dollar's movement in the overseas market. Analysts expect the dollar to head north given the strong growth figures of the US economy and interest rate differentials.

The US Fed is expected to raise its key rate in December and January, which will have a further cushioning effect on the greenback. The RBI usually intervenes in the forex market to curb excess volatility in the local currency. But it is refraining from entering the market as this will drain rupee funds from the market, which till recently was cash-tight, said dealers.

Even the widening domestic trade deficit and huge oil payments add to the bearish sentiment on the rupee. In the forwards segment, the near-term premiums may inch up on account of paying pressure. Largely, the premiums will remain range-bound in December.

Recap: The rupee ended the week at a 14-month low of Rs 46.18 per dollar against Monday's close of 45.96. The dollar has been steadily rising against all major currencies. The US currency was at a 32-month high against the yen on Friday. There is heavy dollar demand from companies as well as importers.

The importers are covering their positions on the back of the steady fall of the local currency. This has exerted pressure on the near-term forwards.