Surplus funds may push gilts rally; Re ranged

Liquidity: In surplus
There are several factors propelling the liquidity, which would continue to remain in surplus this week as well. Foreign exchange inflow is one of the major factors and the flow is a combination of portfolio investments in the domestic equity market and frantic selling of dollars by exporters.

The companies, which raised funds overseas, and exporters are selling their proceeds in the near term to avoid losses since the market is of the view that the rupee is poised to appreciate.

Call: Temporary rise
The call rates may continue to rule below 0.50 per cent, but are expected to inch up to 1-2 per cent temporarily since the week marks the beginning of the reporting fortnight ending August 3.

According to dealers, banks will provide for more liquidity for the fortnight since any measures announced in the monetary policy review will take effect from the next fortnight.

G-sec: Set for a rally
The government securities market is expected to witness a rally in the wake of surplus liquidity. Besides, the usual outflow towards the auction of treasury bills, the RBI will be absorbing only Rs 2,000 crore through the auction of dated security under the market stabilisation scheme (MSS).

The market has already discounted an outflow of Rs 5,000-6,000 crore besides the T-bill auction and therefore the lower amount under the MSS is actually a trigger for brisk trading, says a dealer.

Corporate bonds: Issues afoot
The primary market is likely to witness a string of primary issuances, both in the longer and shorter ends of the maturity. Banks will be the major issuers of tier-II bonds and certificate of deposits for capital requirement.

A flurry of corporate bond issuance is expected since the interest rates for triple-A papers in the ten-year maturity have come down from the highs of 10 per cent to 9.30 per cent and are further expected to come down to 9 per cent following excess liquidity.

Some of the issuance this week will be the 10-year bonds of State Bank of Travancore, Power Finance Corporation, Vijaya Bank, Power Grid Corporation and Indian Railways Finance Corporation.

Rupee: May rise
The spot rupee is likely to appreciate further, but the pace of the appreciation may not be as sharp as the last fortnight's. The rupee has gained 1.2 per cent since the beginning of July till date, following heavy foreign exchange inflows.

This week may witness robust forex inflows from portfolio investors inclined to get invested in the Indian equity market. Since the rupee is appreciating, corporates may also sell the dollar receivables to avoid losses.

"If the rupee breaches 40.30, then it may even reach 40.20 to a dollar," said a dealer of a PSU bank. However, the RBI will be actively guarding the rupee appreciation not to hurt exporters. Even if the month-end demand for the dollars may arise from oil companies, it will be well compensated by the supplies in the market. "" Anindita dey

Forward premia will continue to rule easy since rupee funds required to book forward dollars are available cheap. Dealers said that the premia on forward dollars might rule soft till the liquidity in the market does not get affected by monetary tightening measures of the RBI, which are expected in the forthcoming credit policy.

In this backdrop, the spot rupee is expected to rule in a wide range of 40.25-40.50 to a dollar.

Recap: The spot rupee ruled with a bias towards appreciation following heavy inflows from portfolio investors. However, the spot rupee could not breach 40.30 as the RBI bought dollars aggressively as a part of its intervention plan.

Forward premia on dollars remained lower due to abundant rupee liquidity in the market, while the near term of one month to three months went into discount.

Post-Script
After a gap, volumes in the gilt market reached Rs 16,000 crore last week amid brisk trading.