There is adequate liquidity in the banking system at this point in time. Cash surpluses increased to more than Rs 8,000 crore (Rs 80 billion) last week although it dropped to around Rs 3,500 crore (Rs 35 billion) on Friday.
As a precautionary measure, the Reserve Bank of India, for the fourth consecutive week, cancelled the auction of 91-day and 182-day treasury bills under the market stabilisation scheme. RBI, however, will conduct the regular auction of Rs 500 crore (Rs 5 billion) each.
There are still some temporary hiccups in liquidity for which the central bank has introduced the second round of liquidity adjustment facility with effect from Monday. SLAF will be conducted on all working days except Saturdays and bids for the SLAF will be received between 3 pm. and 3.45 pm.
The normal LAF is conducted between 9.30 am and 10.30 am. The SLAF is aimed at fine-tuning the management of liquidity. The settlement for the LAF and SLAF would be conducted separately and on gross basis.
Another important factor is conflicting opinions among the US Fed members to keep rates benign. The indication from the Federal Reserve about an imminent pause in rate
hikes brings positive signals for the market.
Market players feel sentiment would range from steady to easy. A treasury manager with a private bank said inflows from foreign institutional investors would get evened
out by asset-building happening in the banking system.
Call rates
To track reverse repo rate
Debt market analysts feel call rates would trade close to the reverse repo rate. The overnight rate is expected to move in a range of 5.25-5.50 per cent backed by adequate liquidity in the system. The introduction of SLAF should also solve temporary liquidity issues.
The system is expected to witness outflows in the second week of December owing to redemption of the India Millennium Deposits. Traders said the RBI is likely to inject some liquidity to maintain rates at normal levels.
Recap: Call rates ended the week at 3.00/4.00 per cent on account of reporting Friday,
significantly lower from Monday's level of 5.80/6.00 per cent. Call rates stabilised around reverse repo rate of 5.25 per cent with funds flowing back into the system. The system witnessed an average flow of over Rs 7,500 crore (Rs 75 billion) last week via reverse repo.
Corporate bonds
Volatility in focus
Spreads in the corporate bond market are most likely to rise throughout December. Dealers attribute this to the holiday season in December. Hence, the corporate bond market is likely to witness huge volatility and yields are set to inch up by five to 10 basis points.
Government securities
Bearish undertone
The government securities market will remain range-bound with a bearish undertone this week. There is a slight concern on liquidity, which came under pressure after showing some signs of recovery last week.
Government bonds will witness a movement of 10-15 paise depending upon the fund flows. The benchmark 10-year gilt is expected to trade in around 7.05-7.15 per cent. The actively traded 7.37 per cent 2014 gilt is likely to trade in a range of 6.90 per cent to 7.00 per cent in the reporting week.
The market would remain lacklustre as investors are shying away from holding long-tenure bonds on the back of hardening of rates at the long end.
Only insurers such as Life Insurance Corporation are comfortable with long-tenure papers. Banks have been active on short-term gilts, which can be directly shifted to the 'held to maturity' category with some amortisation to meet their statutory liquidity ratio requirements.
Currency
Greenback demand to dent Re
The rupee will come under pressure in the first half of the week on account of month-end pressure. The rupee is likely to trade in a range of 45.70/90. Typically, corporates demand dollars to meet their routine month-end payments.
This should pull down the rupee to 45.90 levels, said a dealer with a private bank. Even as there is adequate dollar supply by foreign institutional investors into the buoyant equity market, there is higher demand for greenback that is putting pressure on the local currency.
Further, a strong dollar overseas would also weigh on the rupee. Dollar has been gaining strength overseas and the interest rate differential between the US and India has narrowed significantly in the recent past.
Further, concerns about a rapidly widening domestic trade deficit and trade-weighted overvaluation have clouded the rupee's outlook. In the forward segment, the premium is expected to be range-bound.
There may be some pressure on near-term forwards. The six-month and 12-month annualised premiums are likely to hover around 0.65 per cent and 0.55 per cent.
Recap: The rupee weakened to 45.82 on Friday from Monday's close of 45.76, with the dollar strengthening against other currencies.
The benchmark six-month premium ended last week at 0.63 per cent.
Inflation
Northward bound
Market players feel inflation rate should continue to rise gradually and reach 5 per cent by December end and move towards the higher side of the RBI-indicated band of 5.00-5.50 by March-end.
According to analysts, the fall in oil prices to below $60 a barrel provides some comfort and won't result in further hike in product prices.
But pressure from primary articles could continue for some more time. Analysts said the expected softening of prices of primary food articles seems to have begun.