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Near-term liquidity seen tight

Our Bureau

CHENNAI, Aug. 2

BOTH liquidity and market sentiment are likely to be unfavourable in the near term, according to the debt markets update from ICICI Securities (I-Sec).

The report said the gross inflows from coupons and redemptions total about Rs. 15,600 crores (Rs. 2,900 crores, Rs. 9,400 crores and Rs. 3,300 crores in August, September and October respectively). On the outflow side, the CRR hike (Rs. 1,900 crores) and reduction in refinance (Rs. 2,300 crores) would be effected on August 12.

According to I-Sec, if RBI attempts to complete 75 per cent of the budgeted gross borrowings of dated securities by end-October, there could be an outflow of Rs. 26,000 crores on this account.

I-Sec points out that though the market is awash with liquidity at the moment (Rs. 6,525 crores in repos), this is likely to be drained out this month. As seasonal factors accentuate credit demand during this period, we could see sustained tightness over the next three months, the report said.

The report said that WPI inflation has hovered near 6 per cent during the last four months, up from the sub-3 per cent levels seen for a large part of the last fiscal.

The oil pool deficit is reported to be rising and another hike in the administered fuel prices cannot be ruled out. Rising inflation could impact sentiment adversely.

The other cause for concern is the volatility in the currency markets. Despite the measures taken on July 21, the rupee continues to be under sustained pressure. Any action to defend the rupee, either through dollar sales or monetary measures, can only b e bad news for the bond markets, says I-Sec. Call money rates could rise to double digit levels in September and October, leading to higher short-term rates. At the long end, I-Sec expects 10-year yields to cross 11.50 per cent within the next three mont hs, with a reasonable chance of touching the 11.75 per cent mark.

I-Sec's outlook for the gilts market for the next three months is negative. It recommends a defensive portfolio concentrated in cash at the short-end of the maturity spectrum.