The Hindu Business Line : Insurers sell long-term papers to meet VRS payouts

Traders also said that the fall was induced by restriction on treasury operations by most banking and financial institutions during the period. This was partly driven by a steep fall in the trading income earnings during the third quarter of this year. Most banks have reported nearly 50 to 75 per cent drop in treasury earnings.

However, despite this trend, there was little respite from the liquidity inflows into the markets. In fact, for the 4-day repos, the response was over Rs 36,000 crore. This was partly because there was not enough liquid securities going around in the market.

Consequently, with repo rates at 4.5 per cent, bankers found this window attractive to park short-term surpluses.

Bankers also said that during the entire week this trend continued, evident from the fact that in the daily repo auctions, the mop up was in the region of about Rs 28,000 - Rs 30,000 crore. This resulted in somewhat tightening the liquidity situation, particularly at the short-end.

Auction yields of the 91-day T-bills hardened as a result to 4.33 per cent last week, up from 4.25 per cent.

Traders said that T-bill yields firming was indicative that the RBI was unlikely to allow any further softening of interest rates in the market. In fact, expectations are that yields were likely to harden further in the coming months, with T-bill yields moving closer to the repo rate. Ten-year yield to maturity moved to 5.19 per cent last week on a weighted average basis, up from the previous week's level of 5.13 per cent.

The 11.40 per cent 2008 ended the week at 4.86 per cent, 11.50 per cent 2011 at 5.19 per cent, 7.40 per cent 2012 at 5.17 per cent, 7.27 per cent 2013 at 5.19 per cent, 9.81 per cent 2013 at 5.22 per cent, 7.37 per cent 2014 at 5.19 per cent, 7.38 per cent 2015 at 5.29 per cent, 7.46 per cent 2017 at 5.54 per cent, 8.07 per cent 2017 at 5.54 per cent and the 6.25 per cent 2018 at 5.67 per cent.

Yields were also pushed down due to sales by some of the public sector insurance companies to meet their payouts for their respective voluntary retirement schemes. Most of them were in the market to sell some of the long-term securities, particularly the 2017 and 2018 series. In fact, these securities accounted for almost 50 per cent of the daily trading volume of about Rs 3,000 crore. This in turn had increased the floating stock of these categories of securities. Several banks and funds have picked up these securities. The purchase of these securities was for parking banks' excess liquidity. Despite the purchases and consequent increase in volumes as against last week's Rs 2,750 crore, the yield spread between one and 24 years remained high at 165 basis points. This was indicative of the poor trading interest.

Oil companies were in the market to source foreign currency in view of the hardening international oil prices. In fact, oil companies are most active in the forward foreign currency markets. This was evident from the rising forward premiums. Six-month and one-year forward premiums, which had dropped to as low as 0.2 per cent two weeks ago are now over one per cent. One-year forward premium was in the region of 1.1 per cent.

Traders said that the widening forward premiums was also due to the anticipation that domestic interest rates were likely to rise in the short term. This was evident from the difference between the one-year domestic yield and the dollar yield. The difference is currently about 2.5 per cent. Besides, traders said that during the week, prepayments by some corporates and the government of multilateral loans took the heat of the market. During the week, the government has raised foreign exchange by placing 15-year government securities at 5.64 per cent on a private placement basis. This placement, in turn has somewhat alleviated the RBI's requirement of government securities for its open market interventions. In fact, it had run out of these securities given the large inflows into the market. This was especially in a situation where RBI's stock of rupee securities are already on the low side, with stocks of only about Rs 48,000 crore. Accordingly, traders said the prepayments through additional borrowings, would increase the stocks for interventions. The placement of the securities also served as a signal to the market that the RBI was determined to carry out aggressive sterilisation operations and would not allow yields to fall.

The hardening in yields was driven by the inflation effect. With inflation at 6.1 per cent real yields are negative, for up to 24 years.

Traders said that the increase in forward premiums was likely to accelerate the inflow of foreign trade earnings into the country. This trend was already evident with the foreign exchange reserves increasing by $1.11 billion for the latest reporting week to $104.237 billion. In fact, during the last few weeks, FIIs' pullouts hardly had any effects on the foreign exchange markets, in view of large supplies.

Foreign currency reserves are approximately close to about 12 per cent of the gross domestic product. However, traders said that by the end of this financial year, there was the possibility of big jump to about 15 per cent of the GDP. This was partly due to the maturing export payments and also due to increased capital flows.

However, few are willing to make forecasts on yields. The reason is that the credit growth has been accelerating during the last few weeks. Credit offtake for the latest reporting week was Rs 11,417 crore. Bankers said that most of the credit offtake was from the corporate sector for meeting capital expenditure requirements and to a large scale from the domestic infrastructure sectors. Besides, new entrants for credit are export houses who have begun working for procurement of food grains for onward exports.

As a result of the increase in credit offtake, the weighted average yield on assets, which had been fallen during the last few months, was once again rising.

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