Liquidity enhances over the week, overnight call shrinks to 2% - Edelweiss

Liquidity conditions carried forward their comfort of the previous week. Although borrowings under the LAF repo were reported after a gap of 8 days (an average of INR 34.9 bn for January 15 and 16), excess cash under the reverse repo that resumed for the week at INR 289 bn levels, closed higher at ~INR 388 bn on the last trading day. The overnight call correspondingly reported an intra-week low of 2% today while the average overnight rate plunged below the reverse repo level to close at 3.83%.

Non-SLR rates eased over the week as sovereign yields softened from previous week's 6.20% level; the non-SLR yield curve drifted lower across maturities. The one-year certificate of deposits rate softened 40bps over the week to 6.90%, while long maturity corporate papers broke below the 9% mark they had touched in the previous week. PFC's five and ten year papers' yields softened 45bps and 55bps, respectively, to 8.55%. Average daily volumes in the corporate bond segment sustained at the previous week's level; at INR 12 bn.



Liquidity in the following week (January 19-23) is expected to be enhanced on account of large net inflows obtained after accounting for fresh interest and redemption flows of INR 79 bn and the 50bps CRR cut that comes into effect from January 17, infusing INR 200 bn into the system. Overnight rates are expected to hover in the 4-4.50% range while volumes under the reverse repo are likely to pick up from current levels.



Inflation for week ended January 10 scheduled on January 21 is expected to weaken the on-going momentum seen in the aggressive decline in wholesale prices. The January 3-10 week is expected to report hardening in prices of food articles (accounting for 15% in WPI) on account of a the transport strike. The increase in ATF prices (after eight successive cuts) by state-run oil companies by 3.4% will further suppress the momentum. The near term expectation, however, will be sustained at ~4% by the month end, even as markets await the second fuel price cut.

The sentiment in the fixed income segment however would remain bullish both on counts of steadily declining wholesale price inflation and subsequently lower policy rates as well as cash rich participants who would sustain the demand for sovereign bonds and non-SLR papers. We expect the 10-year to retest this week's low (5.37%) despite mounting expectations of a silent monetary policy review on January 27.

Source : Equity Bulls

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