Week Ahead: Liquidity comfort to persist

MONEY & CURRENCIES

The rupee seen in the 40.35-40.55 band against the greenback; Call rates to remain below reverse repo rate; The yield on 10-year government bond seen at 7.90-8.00 per cent.

LIQUIDITY
Fund flows continues

The banking system will remain flush with liquidity with the momentum of foreign fund flows seen enduring this week. Dealers expect the Reserve Bank of India (RBI) to intervene in the foreign exchange market to prevent the rupee from rising much beyond the Rs 40.50 a dollar level.

A major indicator of the RBI's intervention in the foreign exchange market is the $3 billion increase in the foreign exchange reserves in the fortnight ended June 22, though it can be partly attributed to valuation gains. The RBI is unlikely to take steps to drain the excess liquidity.

Bankers do not expect any increase in CRR when the RBI undertakes first quarterly review of monetary policy on July 31, but see enhanced issuances under the market stabilisation scheme (MSS) in an effort to bring down money supply close to 17 per cent from over 21 per cent now.

CALL RATES
To stay below 6%

Banks are likely to see overnight money being available at rates below the reverse repo rate of 6 per cent. The RBI's decision to cap absorption of liquidity through daily reverse repo auctions has left banks with no option but to lend at rates as low as 1-2 per cent on liquid cash rather than not earn anything at all.

The market sees RBI's inaction in pushing the overnight rates in the preferred corridor of 6-7.75 per cent as a signal that the central bank was "unwillingly comfortable" at low call rates, dealers said.

RUPEE
Likely dollar weakness to add pressure

The RBI is expected to cap the rupee appreciation beyond Rs 40.45 levels. The likely weakness in the dollar following the Bank of England raising its signalling rate and the European Central Bank's comment that its policies were still accommodative, might put pressure on the rupee to appreciate.

The additional pressure would come from the continuing foreign flows. Yes Bank, in a note, said it expects rupee to trade in a range of Rs 40.35-40-55 a dollar.

GOVERNMENT BONDS
10-yr yield likely in 7.90-8% range

The government securities market is expected to trade largely on a positive note amid expectations of a comfortable liquidity situation and with inflation remaining closer to 4 per cent. The 10-year yield was expected to be largely in a range of 7.90-8.00 per cent, IDBI Capital Markets said in its market outlook.

If the RBI announces any liquidity sterilisation measures, there could be substantial correction in the market.

The yields would harden significantly from current levels.