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Corporates get out of g-secs; move into bank deposits

C. Shivkumar

Bangalore , July 22

ANTICIPATING a hardening of interest rates, corporates have begun unwinding their Government securities holdings in a bid to avert losses.

Sources said most of these corporates had bought into these securities last year as part of their treasury management. This meant that instead of current account deposits, most of them had parked their funds in Government securities, to earn better returns and at the same time remain liquid. Among the corporates with proactive treasury operations is Reliance Industries, bankers said.

While large corporates bought Government securities directly, smaller ones had opted for debt funds. Most of them had bought into these securities when 10-year yields were in the region of about 6 per cent plus.

Some of them had also participated in the Reserve Bank of India's Treasury bill auctions as non-competitive bidders.

This also partly resulted in pushing down the weighted average yields below the weighted average yields.

For instance, in December 2003, the weighted average yields for 91 day T-bills had gone down as low as 4.17, at least 0.10 per cent (10 basis points) below the RBI's cut-off yields.

The situation has now reversed and non-competitive yields are higher than the cut-off yields due to limited participation by non-competitive bidders in the T-bill auctions.

T-bill yields are now well over the RBI's repurchase rate of 4.5 per cent, the rate at which liquidity is siphoned out of the markets. Moreover yields on dated securities have also moved northwards, and are now ranged between 5.8 per cent and 5.95 per cent. Consequently, bankers said most of them have now begun liquidating their holdings of G-Secs and redeeming their investments in debt funds.

A few incurred losses in such unwinding operations. Any losses were still notional, the bankers said. This was because, most of them were still realising prices that were higher than the acquisition costs. Any further fall in prices would imply that the realisation would drop below the acquisition prices.

In fact, bankers said that corporates were back to parking surpluses in bank deposits.

Unlike in the past, not many are opting for current account deposits. Instead the preference is for the short-term time deposits.

Short-term time deposits earn interest upwards of 4 per cent and 5 per cent for maturities between 7 days and 46 days.

The bankers actually prefer the shorter maturities preferring to roll them over continuously for maximising the returns.

Time deposit figures for all the scheduled banks have grown by at least Rs 62,000 crore on a year-on-year basis, causing liquidity surge in the banking system, bankers said.

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