The Hindu Business Line : Repo deals exceed Rs 50,000 cr for the second day — Redemption of March papers to infuse Rs 15,000 cr

Two securities, the 11.57 per cent 2004 and the 12.50 per cent 2004, have already been notified for redemption by the Reserve Bank of India. These securities, issued in 1998 and 1994, respectively, mature on March 23 and March 25, 2004.

Banking sources said that they were not expecting any fresh issue of securities. In the past, maturing securities were always replaced with a fresh round of borrowings. This is one of the rare occasions when redemptions would be taking place without fresh round of borrowings.

Ms Sunita Gupta, Executive Vice-President of PNB Gilts Ltd, said, "There is really no need for any fresh issues since fiscal targets have already been achieved." Bankers are already beginning to get worried about the impact. Mr Cherian Verghese, Chairman and Managing Director of Corporation Bank, said, "The redemptions will compound the liquidity situation in the banking system." The redemption of these two securities alone is expected to add another Rs 15,000-crore of liquidity. The redemptions come even as the markets are already inundated with liquidity fuelled by foreign currency inflows, estimated at $300 million per day.

Bankers fear that the liquidity surge would bring further pressure on interest rates and yields. This was evident from the response to the one-day repurchase operations on Wednesday. For the second day in succession, the mop-up exceeded Rs 50,000 crore. Besides, 91-day Treasury bills crashed to 4.21 per cent in Wednesday's auctions. Yields on these securities had firmed during the last month and reached a high of 4.42 per cent.

The yields on the long dated securities have also dropped sharply. Already, yields on some benchmark securities such as the 7.37 per cent 2014 have fallen to 5.21 per cent on the back of the liquidity surge.

Consequently, bankers said that the first round of the market stabilisation scheme (MSS) was likely to coincide with the securities redemption. Inclusive of the redemption, the surplus liquidity was expected to top Rs 60,000 crore, well over the limits fixed for the MSS.

Further, bankers apprehend the softening yields would impact investment earnings. The incremental yields are already below inflation up to 20 years. Average yields on investments for most banks are below 7.5 per cent.

However, there is a flip side to this situation. Mr Verghese said treasury profits would continue to drive up profits for all the banks, as they expect their portfolios to appreciate during the year. The profits would be used to beef up the investment fluctuation reserve to comply with the deadline of 2005.

Such a situation also implied that borrowing rates were unlikely to show any increases in the coming months, without a substantial credit pick-up, bankers said. Non-food credit has picked up, though banks are also faced with large deposit accretions.