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C. Shivkumar

BOND markets hardened during last week partly due to the rising credit offtake and year-end redemptions by some of the foreign-owned institutional investors.

Traders said that the part of the upward shift in yields was induced by the signals from the RBI At the weekend repo auctions, the RBI mopped up close to Rs 25,000 crore.

However, at last week's auction, the yield on the 91-day Treasury bill auction was pushed lower to 4.33 per cent, down 10 basis points from the previous week's rate. But traders were hesitant about anticipating another repo rate cut in the near future. The repo rate is currently 4.5 per cent.

Traders said that the RBI signals implied that it would prefer lower rates at the short-end. traders expect that yields were likely to move up slightly, in particular at the long end.

But some traders said that the purpose was clearly to ensure that interest rates remained stable in the markets and bankers pushed for credit instead of focussing on current yields. Mr V. Ravikumar, Executive Vice-President (Treasury), ING Vysya Bank said, "Yields will remain ranged for some time since credit demand has picked up."

However, during the week, the 10-year yield hardened slightly to 5.11 per cent on a weighted average basis, slightly down from the previous week's 5.10 per cent. The markets' favoured securities followed this trend.

The shift in the yield curve was distinct, though rise was more pronounced at the long ends. At the shorter ends, yields have moved up by only about 5 basis points, whereas at the longer ends, the shift was by as much as 20 basis points.

Traders said that this was due to the large-scale pressure on selling due to change in focus.

Trading volumes have also dropped to a third of what it was during the first half of the year.

Daily volumes were barely Rs 3,000 crore.

With yields dropping at the short end, insurance companies have been fairly active. Traders said that all the life insurers in the market had mopped up the entire high-coupon securities.

Among the securities that have become illiquid arethe 11.50 per cent 2013, 11.03 per cent 2012, 9.85 per cent 2015 per cent and the 8.35 per cent 2022. Traders said that the buyer of these high coupons was mostly Life Insurance Corporation of India. In fact, the insurance companies have used this opportunity to reshuffle their portfolios in favour of high- coupon securities. However, the smaller life insurers have been picking up securities such as the shorter dated ones maturing between 2010 and 2011 in a bid to build up large resources for future investments. Among the most active life insurers in the markets was the US- based MetLife, traders said.

Besides, traders said that there was also some worry on the fiscal situation. During the last few weeks, the most active sellers were the public sector banks. Traders said that among the factors that had triggered the selling was the pressure on them to generate large interim dividends for the Government. This was to offset the shortfalls in tax receipts and to meet the fiscal target placed for this year-end.

The banks' selling of securities at the long-end had pushed up yield spreads to about 15 basis points per year beyond 10 years and 5 basis points up to a year. These spreads had dropped as low as 4 basis points two months ago.

Traders also said that some of foreign exchange demand from oil companies and FIIs pushed down the yields. FIIs were liquidating their equity portfolios and simultaneously accessing foreign currency for repatriation. However, for the long term, the impact on the foreign exchange reserves was unlikely to be significant. This was because forward premiums have remained flat at the sub-0.5 per cent per cent levels. In fact, they said that some of the FIIs had begun taking forward cover for inward remittances between three and six months, when the accounting year begins.

Another neutralising element was the steady inflow of current account receipts, both on the merchandise trade account and in the invisibles. These inflows have pushed the foreign exchange reserves to $93.663 billion.

The forex inflows have been soaked up by the RBI's aggressive interventions in the markets preventing any impact on yields, traders said. Besides, several corporates have already taken the hints and begun prepaying some of their foreign currency debts in view of the rising international yields. Others who had lined up external commercial borrowings have deferred their decision and have instead switched to rupee debts.

This was part of the reason for the incremental credit deposit ratio to go over 100 per cent during the week. In fact, most of the banks have liquidated around Rs 4,800 crore of securities for meeting this credit demand.

With yields falling below the weighted average cost of working funds, banks' earnings have been under pressure for some time. The credit pick-up for most of the banks has now come as welcome earnings booster for the year.

This situation has also put pressure on some of the State utilities and State public sector undertakings to push for debt restructuring at the current level of interest rates.

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