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Mumbai, Mar 17: Global investment bank JP Morgan has said that most primary dealers (PDs) are fully leveraged and are running large "carry" positions in the current financial year. In its latest Indian Markets Outlook, released on Wednesday, the trading arm of Morgan Guaranty Trust Company has said that with overnight call rates being consistently above the bank rate for the past one month refinance limits have been utilised to fund these long positions. "Apart from the fact that there is little incremental buying any window of opportunity will be exploited either to show some profit for the financial year or to simply cut down positions," the commentary said.
According to JP Morgan, the RBI is left with few options in such a scenario. However, it would certainly not like to see a spike in rates immediately after a triple rate cut and just before commencement of the new year's borrowing programme. "The RBI can either follow up with another 0.5 per centage cash reserve ratio (CRR) cut or inject rupeeliquidity by outright purchase of dollars from the market. Alternatively, the RBI might decide not to sterilize the entire inflow of Rs 4700 crore from 12 per cent 1999 redemption. A Rs 3,000 crore issuance will ease the liquidity situation and improve the overall market sentiment," the report said. JP Morgan has said that the outlook for the second half of March is quite bad as far as liquidity in the system goes as a net outflow of over Rs 2,000 crore is expected. The advance tax installment is estimated at Rs 4,500 crore for the last quarter of the financial year and another Rs 2,000 crore is likely to flow before the year end for funding the PSU equity swap. "With overnight rates already above the refinance level, further tightening in liquidity could see a potentially volatile call money situation," the report said. The primary dealer has advised market players that trading strategy ahead of the monetary policy should focus on buying the short-end of the curve.
"Improvement in liquidity will resultin steepening of the curve with a larger decline in yields at the short end. Though in price terms appreciation would be preferred for higherliquidity and limited downside in the event of tightening in rates," the JP Morgan report said.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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