Expenditure may ease crunch; Re set to dip

Liquidity: Set to ease
Liquidity is expected to improve this week following the budgeted government expenditure taking off in full swing at the end of the third quarter.

There is no pressure on liquidity, except for a stray demand from banks to meet the requirement towards the third quarter-end of the financial year.

Since foreign funds and banks are buying dollars to repartriate in the calendar year-end, it will add to the rupee liquidity, says a dealer.

The sentiment on liquidity will remain bullish since the market is of the view that most of the FIIs have lined up funds to participate in the ensuing initial public offers (IPOs) of companies in the new calendar year.

The Reserve Bank of India has also been selling dollars in the market to infuse liquidity besides the usual repo route, where banks borrow funds against the collateral of government securities.

Call rates: Likely to head south
Call rates are expected to ease from the highs of 7-8 per cent to a low of 5-5.5 per cent. This will be on the back of improvement in liquidity. Moreover, there will be no pressure on liquidity since outflows from the system are moderate.

Dealers also see most of the banks not preferring to fund the cost of arranging excess liquidity towards the end of the quarter.

Mutual funds, on the other hand, may not be aggressive in lending in the collateralised lending and borrowing (CLBO) market as they expect redemption. The pressure on redemption will be from foreign banks, which operate as custodians for foreign institutional investors (FIIs).

Treasury bills: MSS deferred
RBI will auction the 91- and 364-day treasury bills for a notified amount of Rs 500 crore each.

The central bank has postponed the auction of T-bills towards the Market Stabilisation Scheme (MSS) as the liquidity situation is yet to ease. The postponement of the MSS auction will add to the positive sentiment on liquidity.

Corporate bonds: Issues galore
A host of banks, including subsidiaries of State Bank of India, has lines up certificates of deposit (CDs) to raise funds in the short term for third quarter results.

If the liquidity improves, it may push the yields down in the shorter end of the curve, which, in turn, will prompt a string of CD issues and commercial papers. In the long term, banks, financial institutions and public sector undertakings are expected to come up with bond issues to raise funds.

G-sec: RBI mop-up on
RBI is expected to continue buying government securities to build up the stock of papers for conducting open market operations.

Open market operations require RBI to absorb or infuse liquidity into the market in exchange for the sale or purchase of securities respectively. This had started last week and, for the week ended December 14, RBI purchased government securities worth Rs 2,230 crore.

Rupee: May drop
The spot rupee is expected to rule with a bias towards depreciation. The primary trigger for the rupee to depreciate will be the global strength of the dollar against all other currencies.

The dollar has been gaining following robust economic data as regards retail sales and inflation. Inflows from FIIs will take a while as they will wait for the market to correct and some new IPOs to come to the market.