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Call rates to stay range-bound

Our Bureau

CHENNAI, Sept. 18

CALL rates are expected to remain firm in the 9 to 10 per cent range this week, according to ICICI Securities (I-Sec). In its weekly update on fixed income securities, I-Sec said that liquidity was likely to be tighter during the week due to an estimated Rs 5,000-7,000 crore of advance tax outflows. Tier I refinance at Rs 10,823 crore is almost fully drawn and there are inflows of only Rs 1,400 crore through coupon and redemptions.

Primary cut-off yields in T-bill auctions continued downward. The 14-day T-bill cut-off rate dropped further by 131 basis points to 8.63 per cent, the 91-day T-Bill fell by 13 basis points to 10.24 per cent, while the 182-day T-bill cut-off remained unch anged at 10.44 per cent.

The report pointed out that concerns of high crude prices impacting the oil import Bill have created further pressure on the currency. India imports 73 per cent of its crude requirement, and the oil import bill is expected to cross $18 billion, an increa se of 72 per cent over the last fiscal. Tracking the slide in the rupee, the gilt market has also turned bearish. Yields in the two to four year maturity segment rose almost 20 basis points, while yields at the longer end moved up by 15 basis points. The 11.40 per cent 2008 security lost more than 75 paise from Rs 100.30 (11.34 per cent yield to maturity) and is currently trading at Rs 99.55 (11.49 per cent).

I-Sec said that though the ways and means advances position was unlikely to be under pressure, the development of inflationary expectations, tighter liquidity, renewed currency pressure were likely to mar sentiment in bond markets and pose significant do wnside risks. I-Sec recommends pruning positions at the long end.

In its debt market update, I-Sec estimates that fiscal slippage this year is likely to be of the order of Rs 7,000-8,500 crore. Coupled with the fact that the industrial production growth has been losing momentum, there is likely to be shortfall

in indirect tax collections of around Rs 5,000-7,000 crore.

High crude prices are likely to lead to an oil pool deficit (Rs 8,000 crore at August-end) of Rs 14,000 crore by the fiscal end. This burgeoning deficit is likely to be met by a three-pronged approach -- hike in administered prices, issue of oil bonds an d rationalisation of duty structure on petroleum products in order to transfer the excess duty mop-up to the oil pool. Adjusted for this transfer, the total indirect tax collections are expected to be Rs 11,000-12,000 crore lower than the budgeted estima tes.

The disinvestment blueprint for the current fiscal fails to show any big ticket sell-off. This will further weaken receipts, says I-Sec. It points out that a significant part of the total expenditure consisting of relatively inelastic items -- interest p ayments, salaries and pensions, defence outlay and resource transfer to States, expenditure is not expected to show significant decline.

I-Sec points out that the incremental credit deposit ratio peaks during the third quarter of the year, or the busy season. Over the last six years, this ratio has moved in a band of 82-160 per cent. This coupled with reserve requirements, implies that th e liquidity support from deposits to Government issuances is likely to be insignificant.

I-Sec said that the temporal distribution of monetisation measures (private placements or rollbacks for some of the liquidity measures undertaken in July) and fresh sovereign issuances would determine the movement of interest rates over the third quarter . Compared to Rs 80 crore last fiscal, net monetisation of Government debt stands at Rs 14,400 crore this year. Besides inflation is expected to firm up to 6.5-7 per cent this year. In such a scenario, further monetisation, though unpalatable may be amon g the few options for completing the Government borrowing programme, it added.