Liquidity: RBI holds the key
The outlook on liquidity depends on various factors this week. If the Reserve Bank of India decides to remove the cap on the amount raised under the reverse repo, it will immediately modulate the liquidity.
If this is coupled with a CRR hike, then call rates may shoot up. However, if there are no such measures taken, liquidity may continue to remain easy.
Reverse repo is the mechanism through which the RBI absorbs excess liquidity from the system.
Going forward, it will depend on the strength of the foreign exchange inflows into the Indian market. Even if in the medium term, forex inflows are expected to be strong, the strength of the inflows are doubtful in the near term of a fortnight or a month.
This is because the global meltdown in equity markets is resulting in fund houses liquidating their positions in riskier assets.
Call: May move up
If the RBI announces any liquidity-tightening measures or removes the cap on the amount to be sucked out under the reverse repo mechanism, call rates may inch up.
Even if there are no measures taken by the RBI, call rates are expected to inch up a bit as outflows to the tune of Rs 19,000 crore (Rs 190 billion) are slated this week.
If the equity market meltdown continues, the outlook on liquidity may turn jittery due to the FII outflows. This may also result in call rates moving up.
Treasury bills: Yields may rise
The RBI will be auctioning the 364-day and 91-day treasury bills for Rs 2,000 crore (Rs 20 billion) each. The cut-off yield on these papers depends on the monetary policy review.
If there were any liquidity-tightening measures, the immediate impact would be seen in the shorter end of the interest rate, said dealers. Therefore any decision by the RBI to curb excess liquidity may push the cut-off yields up for T-bills.
Even if there are no announcements, outflows of Rs 19,000 crore (Rs 190 billion) from the market may push the yields up a bit compared with soft rates seen last week.
G-sec: Brisk trade ahead
The action in the government securities market depends on the monetary policy review this week. If the RBI maintains a status quo on interest rates and the CRR, the market may witness a rally, albeit a restricted one. This is because outflows to the tune of Rs 19,000 crore (Rs 190 billion) are slated this week.
By the weekend, the market may witness brisk trading. The situation may change if the RBI removes the cap on the amount of liquidity sucked out under the reverse repo or if there is a hike in the CRR or interest rates.
Another reason that may weaken the market is the foreign exchange inflows since it is one of the major contributors of liquidity in the market. The government will auction dated securities worth Rs 10,000 crore (Rs 100 billion) and Rs 5,000 crore (Rs 50 billion) as a part of its borrowing programme and the market stabilisation scheme (MSS) to suck out excess liquidity respectively.
Corporate bonds: Floats on hold
Many of the major long-term bond issuers such as State Bank of India (SBI) and Nabard have put their floats on hold awaiting the monetary policy review this week. Since liquidity is surplus, market players are of the view that interest rates may come down in the medium term even if the RBI announces monetary-tightening measures.
This will be basically on the back of robust foreign exchange inflows. SBI is planning to come out with a perpetual bond issue to raise Rs 1,500 crore (Rs 15 billion).
Rupee: Likely to decline
The spot rupee is likely to rule with a bias towards depreciation. Foreign exchange inflows may not be as robust as they were a few weeks ago. The slowdown is perceived to be a fallout of the global meltdown in equity markets.
Foreign institutional investors are likely to be seen liquidating their positions in the risky assets across markets since strengthening of the yen has triggered a fear of rising interest rates on the yen.
Rising interest rates of the yen may push costs of yen carry trade, which is a swap cost for borrowing in the yen and converting into the dollars to invest and take advantage of the low interest rates on the Japanese currency.
Forward premia are expected to firm up since the market expects monetary tightening in the forthcoming credit policy review to curb surplus liquidity in the market.
In this backdrop, the spot rupee is expected to rule in a wide range of 40.32-40.80 to a dollar.
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