MUMBAI, March 3: Interest rates are likely to harden in the second fortnight of March due to a large outflow of money from the banking system on account of advance tax and VDIS payments.According to I-Sec debt market update, "the entire surplus available and more will be absorbed by the advance tax plus VDIS outflow estimated at Rs 5,000 crore."
The fact that substantial sums are being invested in short-term repos, rather than higher yielding treasury bills indicates of an impending tightness in the money market, says the I-Sec debt market update.
At present, the secondary market activity in treasury bills is largely restricted to the April-10 and April-24 maturities.
These two treasury bills account for over 70 per cent of the total traded volume of Rs 3,428 crore. Yields on treasury bills have hardened marginally by 25 to 50 basis points over the previous fortnight. Further, the partial swap maturities towards March end are likely to squeeze liquidity and tight market conditions could be expectedto last till the first week of April.
Subsequently, maturity of 13.50 per cent, 1998 securities and redemption of the April 24 treasury bill would result in a net inflow of money and ease the tight liquidity conditions, says the report.
According to I-Sec report, any spurt in treasury bills yields should be viewed as an oppurtunity to enlarge positions at the short-end. However, large maturities in the month of April coupled with the increased probability of reversal of the January 16 measures as we approach the next credit policy should ensure a relatively bullish April and provide exit opportunities for these positions, says the report.
The report also estmates that the drain on Reserve Bank's reserves on account of the defence of the rupee by selling dollar in the spot and forward market would be in excess of $5 billion.
This will bring the level of uncommitted foreign reserves below the end March, 1997 figure of $25.68 billion. "Though, on earlier occasions, the RBI has been successful inrecovering the expended reserves within a few months, this time it could take as long as six to twelve months for RBI's reserves to hit the $30 billion mark," the report says.
According to the report, overnight rates are expected to remain at the current levels though there would be some tightening towards mid-March due to liquidity drain caused by the ouflow on advance tax and VDIS payment.
The call rates had been hovering around the fixed repo rate of 9 per cent for over a month. Subscription amounts at repos have increased over the fortnight with the total outstanding in excess of Rs 4,400 crore as on February 27.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
