The external value of the rupee as also domestic liquidity in September would depend to a great extent on the manner of deploying the $4.16 billion gained through the RIB issue, the ICICI Securities'(I-Sec) bond market update stated.

The RIBs have been raised with the purpose of supporting infrastructure projects. However, this would be in a staggered manner and its short-term deployment has the potential to fund dollar forward transactions.

``We expect the RBI to keep a close watch on the proceeds and ensure that no indirect investment route leads to the forex market,'' the report said. According to I-Sec estimates, most of the money should fund gilts and DFI paper over the near term.

September is otherwise a relatively tight month with no major bond redemption inflows but with significant outflows in the form of advance corporate tax (expected to be in the range of Rs 7,000 crore).

The possibility of further dated security auctions to complete the remaining Rs 23,355 crore of the borrowing remains a constant pressure in short-term liquidity, I-Sec added. Domestic banking sector liquidity seems to be adequate to support the government's borrowing programme in the absence of corporate demand.

Given the continuing Asian economic decline which would imply depresssed commodity prices, the external value of the rupee would not be free from concern, I-Sec said, adding that the risk to any sustained positive price move in the bond market would be from the forex market.

Bond market rallies would not extend beyond the four to five year maturity bucket and any upward pressure on medium- and long-term yields would be contingent on a sustained revival in corporate demand.