10-year benchmark to trade in 8.20-8.35% range

Harihar Krishnamoorthy, Head, Treasury, FirstRand Bank

The banking system is running short of liquidity by around Rs 50,000 crore and is expected to remain in a deficit mode during the week.

In terms of material liquidity moves, the markets should see outflows of Rs 11,000 crore on account of G-Sec auctions and another Rs 10,000 crore on account of Treasury bill auctions and a further small ouflow of Rs 1,200 crore because of state loans.

However, these outflows should be offset by redemption inflows of Rs 6,000 crore as well as salary payments and traditional government spending.

While call rates will revolve around repo rates, short-term money market rates are expected to trade in a narrow range and as there are no major events on liquidity front this week. Threemonth, six-month and one-year CDs are expected to trade in a range of 9.10-9.25%, 9.20-9.40% and 9.40-9.75%, respectively.

Government security markets are also expected to be ranged, ahead of the September Credit Policy expectations, with rising food inflation keeping alive possibility of a hike, despite the expected slowdown of growth in the economy. The 10-year benchmark will trade in a range of 8.20-8.35% with a slight upward bias.

While the US Fed did not announce any QE3, it has left open a possibility for the FOMC meet.

These have global implications, as any liquidity pumping move could push up commodity prices and have an inflationary impact for other countries. On the other hand, the Chinese government has relentlessly pursued inflation and could set the tone for the rest of the world.

The OIS market will track G-Sec movements and one-year and fiveyear OIS are expected to trade in a range of 7.60-7.85% and 6.80-7.05%, respectively.