Tax outflows to drain liquidity

LIQUIDITY
Eye on borrowing plan

Advance tax outflow is expected to dent the surplus liquidity. Yet, the overall situation is expected to remain on the higher side.

Traders will also be awaiting the government's borrowing schedule for the second half of this financial year. Advance tax payments by companies could shrink banks' liquidity by about Rs 20,000-25,000 crore.

The market will witness inflows worth Rs 92.23 crore. Outflows are pegged at Rs 5,500 crore on account of the auction of 91- and 182-day treasury bills.

Analysts expect inflation to face an upward pressure for the next 4-6 weeks.

A key factor to watch is how manufacturing prices pan out on account of higher fuel prices. There is also one more base jump ahead in the next couple of months. However, overall, in price terms, the index will have an upward movement.

Comfortable calls

Call rates are expected to remain steady despite the advance tax outflows. They will hover in the 5-5.05 per cent range. Even if liquidity will be dented, call rates will stay comfortable as banks are flush with deposits.

2 t-bill auctions ahead

The RBI has announced two sets of auctions for the coming week.

The auction of 91-day government of India treasury bills for a notified amount of Rs 4,000 crore (Rs 500 crore under the regular auction calendar and Rs 3,500 crore under the market stabilisation scheme) has been announced.

Secondly, the RBI will be also auctioning 182-day treasury bills for a notified amount of Rs 1,500 crore.

Of this, Rs 500 crore will be auctioned under the regular auction calendar and Rs 1,000 crore under the MSS.

Recap: Inflation fell to 3.01 per cent for the week ended August 27. Calls hovered in the 4.95-5.5 per cent band. Brisk trading in treasury bills was triggered by the surplus liquid situation of banks and mutual funds.

CORPORATE BONDS
Tier-II floats on card

The corporate bond market will remain buoyant with a string of tier II bond issues by banks aimed at boosting their capital base.

The banks include ICICI bank, Bank of Baroda and Union bank of India. However, this might not translate into a vibrant trading in the secondary market.

This is partly due to the unavailability of outstanding floating stock of corporate papers in the market. Moreover the papers are picked up by the market players who keep it till maturity for earning the interest rate differential.

Mibor-linked non-convertible debentures (NCDs) continue to be popular along with the commercial papers (CPs) for raising short-term funds.

NCDs give the flexibility of floating rate for the issuer and the investor, wheres CPs lock the interest rate for a maximum of 90 days.

However, with an uncertainty prevailing on the interest rate front, most of the companies are issuing short-term instruments to raise funds from the market.

Recap: The corporate bond market remained active on the primary side with closing of the issue from Bank of India and Indian Oil Corporation.

The Indian corporate sector issued a total of 1955 CPs amounting to a total outstanding amount of Rs 19,207 crore as on August 31.

The spread between 5-year triple-A corporate bond and the corresponding government security continues to remain at 40 basis points.

GOVERNMENT SECURITIES
Fed meet holds key

The government securities market has turned cautious ahead of the US Federal Reserve's meeting slated for Tuesday. Traders expect Fed to hike the rates.

Another crucial determinant is the RBI's announcement of government's borrowing programme.

The quantum of borrowing in the second half of this financial year is likely to be Rs 50,000-55,000 crore.

According to dealers, the gilt market is expected to witness brisk trading backed by liquidity and valuation concern towards the end of the second quarter. The 10-year benchmark yield is seen moving in the range of 6.90-7.10 per cent.

Recap: The government securities market traded in a narrow range taking a cue from global crude oil prices. Softening of the US treasury yields coupled with adequate liquidity helped the government bonds extend modest gains during the week.

Even as the yield on the actively traded 7.37 per cent 2014 stock fell by two basis points on Thursday, the higher-than-expected-inflation on Friday muted its gains.

CURRENCY
Demand for dollars

The spot rupee is likely to remain range-bound with a bearish undertone. This is because the equity market is likely to witness profit booking that might lead to a slight outflow of funds. Inflows from foreign institutional investors, on the other hand, are likely to slow down.

There are no major inflows from the direct investment front as seen in the last week. FDI from both Posco and insurance claims of Oil and Natural Gas Commission (ONGC) had supplied the market with adequate supply of forex last week, dealers said.

On the other hand, demand for the dollar will continue to pour in from importers and oil companies.

With the market expecting a rate hike in the Federal Open Market Committee (FOMC) meeting, the dollar will be on an appreciating mode.

To this backdrop, the spot rupee is expected to remain in the range of 43.70-44 against the dollar.

Forwards to go up

There will be paying pressure on the forward dollars. While supply of dollars in the forward market will be limited as exporters will watch every point of depreciation in the movement of the rupee-dollar exchange rate before realising their export proceeds.

On the other hand, there is likely to be good demand for forward dollars to cover the near-term exposure from importers.

Demand for the spot dollar from oil companies will push the dollar-rupee exchange rate down.

Therefore, there will be an additional pressure on the premium on forward dollars to go up tracking the spot rupee.

Recap: The spot rupee remained rangebound last week moving in band of 43.76/91 against the dollar. Similarly, premiums on forward dollars also ruled in a comfortable range.

With oil prices are moderating within $64-65 per barrel, the panic buying of dollars subsided last week.