Liquidity and performance of domestic equity markets are crucial for the market. The ten-year benchmark is expected to rule in the 7.50-7.55 per cent band; The spot rupee is likely to move in a range of 44.75-45.25 against the dollar.
LIQUIDITY
Rush for funds unlikely
Liquidity is expected to improve. Banks have already provided for the reserve requirement last week and, therefore, there will be no rush for funds.
The Reserve Bank of India (RBI) is likely to intervene in the foreign exchange market to buy dollars and sell Indian rupees so as to bring down the strain on liquidity.
According to dealers, the apex bank, last week, had intervened to infuse rupees worth $700 million into the market. As per the data released by the Weekly Statistical Supplement, the foreign exchange reserves have gone up by around $1.2 billion.
The market is of the view that while around $500 million were added to the forex reserves from revaluation gains, rest has been bought by the RBI from the market to infuse rupees into the market.
There is inflow of around Rs 4,841.53 crore (Rs billion) through coupon redemption and maturity of government papers.
Moreover, the equity markets are likely to witness heavy inflows from foreign institutional investors. This in itself will act as a psychological booster dose for the market.
The market will witness a net outflow of Rs 4,159 crore (Rs billion) through treasury bill auction and government borrowing programme. A sum of Rs 9,000 crore (Rs billion) will be absorbed from the system as against an inflow of Rs 4,841 crore (Rs billion).
CALL RATES
Soft run ahead
The interbank call rates (the rate at which banks lend or borrow for daily fund management) are likely to mellow as a result of comfortable liquidity position.
Rates on the collateral borrowing and lending obligations (CBLO) are also expected to rule soft. However, since liquidity remains key, daily fund management by banks will have a bearing on the call rates. This is because the situation has changed since the time when the market used to be cash surplus.
Since liquidity is not in surplus and credit demand is on an upswing, banks will find it difficult to lend.
This is already evident from the fact that there is rush by not only private and foreign banks but also public sector banks to raise deposits. The bulk deposit rates have shot up to 8/8.5 per cent across banks.
TREASURY BILLS
Yields may not go up
There are two treasury bills - 91-day and 364-day- slated to be auctioned for Rs 2,000 crore (Rs billion) each. If the liquidity improves, the yield on the t-bills may not inch up further. Otherwise, there might be a strain on the yield. This is because the liquidity crunch is increasingly getting factored in the shorter end of the maturity.
The secondary market for t-bills may not see much action as banks and primary dealers are busy stocking up long-term papers anticipating demand from insurance companies and provident funds.
Market players are of the view that once the FII limit for debt market investment is revised and linked to the annual issuance of government securities, the demand for t-bills will get a boost.
This may take a while since foreign investors will be active in the market only after the annual winter break, said a dealer.
Recap: The inflation rate for the week ended November 3 figured higher at 5.30 per cent as against a much benign rate of 5.09 per cent for October 28. The high inflation has been on account of rising prices of essential commodities.
CORPORATE BONDS
Lacklustre demand to continue
The corporate bond market is in a critical stage. This is because even as the market is witnessing a growth in credit demand, not many borrowers are keen on raising funds from the market.
This is because the banks are shying away from investing in bonds due to requirement for marking to market. This refers to daily valuation of the portfolio depending on the market rate and in the event of loss, the bank is required to provide for capital.
Loan, on the other hand, does not demand such valuation norms. Moreover, since the banks are raising money through high-cost deposits, they are not willing to lend to triple-A corporates at finer rates.
It could be clarified that loans are not costlier than bonds, but bonds are fetching a cheaper rate compared with loans as they are benchmarked against government securities. The government securities, on the other hand, are witnessing a sharp fall in the yields.
Therefore, primary issuance in the bond market have been quite lacklustre. UTI Bank is in the process of raising tier-II bonds for 15 years at 9.35 per cent. Infrastructure Development Finance Corporation is in the market to raise money for five years at 8.60 per cent. Oriental Bank of Commerce proposes to raise money through perpetual bonds but is yet to finalise its plans.
The secondary market will see a good demand from provident funds and insurance companies which are investing in these papers for good yield differential. This is because even as the yields in the government securities have fallen, it has not translated into a similar fall in corporate bond yield.
Banks across board, on the other hand, have been actively raising funds through certificate of deposits (CD) which has pushed up rates to 8.5/8.75 per cent for 180-364 days.
Recap: The spread between the ten-year government security and triple-A corporate bond continues to be at 100
GOVERNMENT SECURITES
Brisk trading ahead
The market is expecting an improvement in liquidity which may leave banks with some surplus to indulge in securities trading. In anticipation of the announcement of a government auction, the market has already witnessed profit taking during the end of the last week.
This, according to dealers, has readied banks and primary dealers for participating in the auction, leaving some room for investments in the government papers.
Dealers point out that the market may witness brisk trading since the paper to be auctioned as part of the government borrowing - 8.07 per cent 2017 - is a liquid stock.
Moreover, the RBI has also eased the norms for the when-issued scheme. The when-issued scheme refers to trading in the government security that is yet to be auctioned by the RBI. The scheme helps in better price discovery.
Moreover, there will be heavy demand for the government securities in the longer term of the maturity since there could be a short supply of such papers. This is because the auction calendar released by the RBI does not offer much stock of long-term government papers.
Globally, the movement of the US treasury bonds yields will be another trigger. This is because the housing data from the US markets have been weaker than expected. This is likely to bring down the yield on the US treasury papers which, in turn, will be positive for the domestic bond markets.
On the flip side, oil prices are on a high and the market is expected to be on tenterhooks till the time a clear indication is there on demand and supply estimate. This is crucial as the demand for oil in the winter months is conventionally very high.
In this backdrop, the yield on the ten-year benchmark paper is expected to rule in the range of 7.50-7.55 per cent.
Recap: Government securities at the longer end of the maturity witnessed a rally. Incidentally, the spread between the 10-year and 30-year government papers has reached historic lows of 20-25 paise as against the usual gap of 100-120 basis points.
Market players are of the view that long-term papers are in short supply going by the auction calendar released by the RBI. On the other hand, due to the regulatory requirement, the insurance companies and provident funds will have to buy long-term papers for the portfolio.
Therefore, banks are engaged in piling up stocks and earn a good investment return by the time the long-term players come to the market.
RUPEE
Wide range seen
The spot rupee is in a critical position as there are equal number of factors favouring an appreciation as well as depreciation.
The domestic equity markets have been buoyant and are expected to remain upbeat this week barring minor bouts of correction. This may invite foreign exchange inflows that may prop up the rupee against the dollar.
The data released from the US - industrial production, consumer price index and TCI - have been mixed and the combined effect has pulled down the dollar against major global currencies. The housing data have been weak and the dollar is likely to get beaten globally.
On the other hand, there has been a host of positive factors for the euro to perform well. The economy is doing well backed by a net trade surplus.
The yen, on the other hand, is likely to appreciate against the dollar as the market is of the view that the Japanese monetary authorities might voice a hawkish stance on the economy if not opt for a base rate hike, said a dealer.
The effect of the cross currencies, therefore, will be positive for the rupee indirectly against the dollar.
However, domestic demand for dollars is strong both for oil and non-oil imports. The genuine importer demand will be further aided by the dollar demand by banks as part of the RBI intervention. The banks may be seen buying dollars to infuse rupee liquidity in the market on behalf of the RBI.
The forward premiums, on the other hand, will be determined by the rupee liquidity. It is perceived that the premiums might inch up since there will be genuine dollar demand from corporates as well.
Besides, the moderate status of the liquidity in the rupee market is reflecting itself in the rate at which the rupee has to be bought for swapping with dollars for booking a forward cover.
A forward cover is a hedge against foreign currency fluctuation which is worked out by buying dollars today for a future date of requirement at a predetermined rate. The rise in the rates of the forward premiums will be more noticeable in the near term of one and three months.
In this backdrop, the spot rupee is expected to rule in the range of 44.75-45.25 to a dollar.
Recap: The spot rupee was highly volatile during the week. It depreciated in the beginning of the week by Hitting 45.35/45.36 following rapid dollar buying by banks on behalf of the RBI to infuse rupee liquidity into the market and whetting the importer appetite for dollars.
Towards the end of the week, it appreciated sharply with dollar inflows into the domestic equity market. However, forward premiums which were ruling relatively easy for the week, inched up towards the end following strain on liquidity.
