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Tax outgo may squeeze liquidity
March, 12th 2007

Liquidity To be strained 
Liquidity is expected to tighten after the advance tax outflows on March 15. The outflows are estimated to be in the range of Rs 30,000-40,000 crore. There will also be a net outflow of around Rs 4,800 crore from the system on account of liquidity-tightening measures of the RBI. 
The rush for liquidity will be further enhanced by banks, which are busy expanding their balance sheets to increase the size of their assets by the year-end. On the foreign exchange front, dealers expect more of corporate sales of the dollar rather than portfolio investments into the equity market. 
Call money May head north 
Inter-bank call rate may firm up this week owing to a tight liquidity situation. Even if the tax outflow is towards the weekend, bankers will be cautious in setting aside funds right from the beginning of the week. 
However, the call is unlikely to touch a high of 9-10 per cent, as the RBI has capped the amount to be accepted under the reverse repo route. Reverse repo route is the RBIs liquidity-absorption mechanism. 
Treasury bills Yield may rise 
The RBI will issue 91-day and 365-day T-bills for auction to raise a total of Rs 4,000 crore. The cut-off yield of the T-bills is likely to inch up, as the market players expect liquidity to tighten after the advance tax outflows, even if it is abundant right now. This is evident in the RBI receiving bids above Rs 25,000 crore in reverse repo, even as banks are raising one-year funds through certificate of deposits at 10.25-11 per cent. 
G-sec Lukewarm trade 
The trading interest in the government securities will be lacklustre, as the outflows are far in excess of the existing liquidity in the system. The equity market may not be too buoyant as well, with the global meltdown yet to unfold completely, feel market analysts. Even if exporters and companies are likely to sell their dollar proceeds, there will be intervention to check the excess rupee liquidity flowing into the system. Moreover, with the financial year approaching to a close, most of the banks will not like to reshuffle portfolio to avoid depreciation in market value. On the other hand, there may be some interest in government securities, if there is government expenditure. In addition to this, demand from Life Insurance Corporation (LIC) may perk up the market. This, however, depends on the decision taken in LICs investment committee meeting held over the last weekend. In this backdrop, the ten-year benchmark yield is likely to rule in a wide range of 7.95-8.05 per cent. 
Corporate bonds LIC boost likely 
The corporate bond market continues to be subdued except for the short term. LIC may be a buyer in long-term bonds and this could set new rates for the benchmark bonds. 
In the primary market, there are lots of issues open for subscription, but are receiving thin response, say dealers. At present, Bank of Maharashtra and State Bank of Saurashtra are offering 9.90 per cent and 9.80 per cent to raise 15- year and 10-year funds, respectively. On the other hand, rush for short-term deposits has pushed up rates for 1- year certificate of deposits beyond 10.5 per cent. 
Rupee Mixed bias seen 
The spot rupee is expected to rule with a mixed bias. Since the market is cautious on liquidity, banks may be seen selling dollars to raise rupee resources following tax outflows. 
On the other hand, market is discounting dollar inflow under portfolio investments, as the equity market may not be on a roll. Market players expect the bouts of profit-taking by institutional investors to continue as part of the global meltdown, feel dealers. 
Moreover, the dollar is expected to appreciate, as the non-farm payroll data have been above expectation. This will further put pressure on the rupee. 
The forward premium is likely to inch up, as the rupee liquidity may tighten after the outflows towards advance taxes. Moreover, with crude prices a bit volatile, the dollar demand may crop up from oil importers. In this backdrop, the spot rupee is expected to rule in the range of 44.15-44.30 to a dollar. 
Recap: The spot rupee depreciated to a low of 44.6950 during the week following heavy dollar buying by foreign banks on behalf of their institutional clients. The FIIs were seen pulling out of the market following a fall in equity markets across the globe. 

Anindita Dey

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