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Tax outgo likely to drain liquidity; Re may dip
September, 17th 2007
Liquidity remains a crucial factor this week. The market will witness an outflow of around Rs 30,000-35,000 crore through advance taxes. Even if this has been factored into, actual outflow will make a dent, says a dealer. Over and above it, banks will have to set aside funds for the fortnightly cash reserve ratio (CRR) maintenance. The CRR is the cash deposited with the RBI as a proportion of the deposits mobilised by banks every fortnight.
Secondly, inflows of foreign funds may take a while. The US Federal Reserve is expected to cut its base Fed rate this week and this will ease the pressure on other central banks to raise rates. Therefore, for higher returns, funds may flow into emerging markets, but after a lag.
This week, the market will see an inflow of a mere Rs 374 crore as against an outflow of Rs 36,000 crore from the system. This includes an estimated outflow of Rs 30,000 crore through advance taxes, which may exceed as well.
Call rates: May rise
Call rates may inch up this week after the outflow towards advance tax. However, the market feels that the RBI may not have to infuse liquidity through the repo window. Banks are already cautious with liquidity since the last week. Despite that, the RBI has been absorbing funds to the tune of Rs 20,000-25,000 crore daily from the market. This has to be seen along with the funds parked under the collateralised lending and borrowing scheme, where banks borrow against the collateral of government bonds.
Treasury bills: Yields may go up
The RBI will auction 91-day and 182-day treasury bills for a notified amount of Rs 3,500 crore (Rs 3,000 crore for the MSS) and Rs 2,500 crore (Rs 2,000 crore for the MSS). The cut-off yield on the T-bills is expected to inch up compared with the levels seen last week. This is because liquidity is likely to tighten following an outflow towards advance taxes. This tightness, dealers say, will get reflected in the shorter end of the maturity since the outlook on liquidity is only for the short term.
Corporate bonds: No major issues
Primary issuers in the longer-term maturity will wait for fresh cues on interest rates in the market. This is because the benchmark government securities market itself is waiting for the Open Market Committee meeting of the US Federal Reserve and advance tax outflows to take a view on interest rates.
Apart from a tier-II bond issue of Allahabad Bank to raise Rs 500 crore, no issuer has firmed up its plan to raise funds. In the secondary market, investors are waiting for fresh issues to invest. Mutual funds expect redemption from clients to meet advance tax outflows and are thus wary of investing.
G-sec: Awaiting Fed cues
Even if inflation has come down, the crude oil price is playing the spoilsport by reaching an all-time high of $80 a barrel. The market was expecting the RBI to cut down the issuance under the Market Stabilisation Scheme (MSS) for absorbing excess liquidity, owing to huge outflows towards advance taxes. The RBI is auctioning Rs 6,000 crore against an expectation of Rs 3,500 crore, says a dealer.
The market has already discounted a 25 basis points cut in the Fed rate at the Open Market Committee meeting to be held on September 18. There is, however, a strong view of the Federal Reserve holding on to the rates for some time since concrete evidence of either controlled inflation on the back of rising crude oil prices or slowdown in the economy is yet to figure.
Re: Headed south
The spot rupee is expected to rule with a bias towards depreciation this week. This is because crude oil has touched an all-time high of $80 a barrel and it would push the importers to at least cover the near-term requirement of dollars for about three months.
Secondly, foreign exchange inflows from portfolio investors are uncertain at least this week. If the Federal Reserve decides to cut rates, this may augment inflows in emerging markets for higher returns. However, if it is put on hold, the entire interest rate scenario may change and funds will take time for fresh allocation to emerging markets.
The annualised premium for booking forward dollars may inch up after outflows of the rupee liquidity towards advance taxes. This will be coupled with the need for dollars by importers to cover for oil purchases.
In this backdrop, the spot rupee is expected to rule in the range of 40.35-40.70 to a dollar.
Recap: The spot rupee reached a high of 40.41-42 to a dollar following an appreciation of all major currencies against the dollar last week. The RBI intervened in the market to absorb around $1.5 billion from the market to prevent a sharp appreciation of the rupee.
Post-script: Crude oil reached an all-time high of $80 a barrel.
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