The spot rupee is expected to rule in the range of 46.10-50 to a dollar; The benchmark 10-year paper is expected to hover in the range of 7.65-74 per cent.
Tax outflows to pinch
The liquidity position may harden temporarily owing to advance tax outflows this week. Moreover the intensity of the foreign exchange inflows, which boosted sentiment last week, may cease, feel dealers.
Profit taking by banks is, however, likely to generate liquidity. This is because banks will encash investments to improve profitability for the half year ended September 30 . The funds thus received will circulate in the system.
In the near future, sources of liquidity may be a concern as demand on liquidity is likely to rise from credit , government borrowing and fund raising by banks for capital adequacy.
Foreign exchange inflows may not be as robust as in the earlier years . This is because interest rate arbitrage which used to be selling point of the Indian market does not exist owing to rates hardening globally.
However the proposal of capital account convertibility on increasing investment of foreign institutional investors in government securities and corporate debt may trigger good inflows.
The system will witness an outflow of around Rs 4000 crore against an inflow of Rs 1823.74 crore .
May head north
Interbank call rates may harden a bit given the outflows towards the payment of advance taxes. Banks may prefer to set aide liquidity so as to prepare themselves rather than lending it in the call market.
This may result in lowering of bids for reverse repo with the RBI as well. Reverse repo is a mechanism through which the RBI absorbs excess liquidity from the system .
Eyes on cut-off
The cut-off yield in the auction of treasury bills will be primarily driven by brisk trading. Besides banks, mutual funds have also started actively trading in t-bills. This is because MFs have to invest in liquid schemes which are short term in nature.
There are two treasury bills to be auctioned this week - 364 day t- bill and 91 day t- bill, for RS 2000 crore each. The amount forms part of government borrowing programme as well as market stabilisation scheme.
Profit booking seen
Concern over setting aside liquidity for advance tax payments and balance sheet before the half-year ends may trigger profit booking by banks. Banks bought heavily during the rally last week and would like dispose of when the yields are still lower, said a dealer.
While low crude prices has been a positive trigger, oil inventory data from the US remain a cause of concern. However, after advance tax outflows are over, the market will remain active as banks, provident funds and mutual funds trade afresh.
The undertone may remain bearish given the continuous flow of healthy economic data from the US and this could result in a rethink on rate revision by policy makers in the US, said a dealer.
In this backdrop, the 10-year benchmark paper is expected to rule in the range of 7.85-7.90 per cent.
Brisk buying to continue
The corporate bond market continues to remain active with buying from banks, finance companies and mutual funds. This is in addition to the brisk trading in commercial papers and certificate of deposits . Banks are , however concentrating on issuance in the short and medium term segment of the maturity.
New issues from banks and public sector undertakings are expected during the week. This includes a tier II issue from the State Bank of India.
The bank will raise around Rs 1000 crore and has the option to mop up more under the greenshoe option. In the fray, are Punjab national Bank and Konkan Railway Corporation.
In the secondary market, mutual funds are also seen investing in commercial papers and certificate of deposits to deploy inflows of their liquid scheme.
The jobless data released in the US has been encouraging for the dollar. Jobless claims have come down by 9,000, which has resulted in the dollar rallying against other currencies.
Oil, on the other hand, has mellowed but consistent dollar demand by importers for oil payments is likely to put pressure on the rupee. The market is also awaiting the oil inventory data to be released in the US.
Foreign exchange inflows, which remained a major source of appreciation for the rupee last week, may not continue with the same fervour.
The Bank of Japan has decided to stay away from further rate increases. This has led to a weakness in the yen, which is affecting other Asian currencies. Therefore, the spot rupee is likely to rule with a bias towards depreciation.
The premium on forward dollars will continue to rule high. Importers are buying dollars both for oil and non-oil imports. The anxiety over whether the US Federal Reserve may again think of a hike has widened rate differentials between the US and India .
Supply is restricted to only dollar sales by exporters. Foreign exchange inflows from institutional investors continue to remain muted. In this backdrop, the spot rupee may move in a range of 46.10-50 to a dollar.
Recap: The spot rupee appreciated this week following robust foreign exchange inflows. The inflow was triggered by the clarification by the government that it is not in favour of the recommendations of the capital account convertibility report that suggested banning participatory notes.
Buying of dollars by importers, on the other hand, kept the premium at higher levels.
Post script : Inflation rate for the week ended August 26 crossed 5 per cent to touch 5.01 per cent owing to rise in food prices.