The Hindu Business Line : RBI assurance to bankers lifts bonds

Moreover, they were also assured that investment guidelines would be altered to reduce the balance sheet impact during the second quarter. Bankers had sought a revision in the ceiling of the held to maturity category from the current level of 25 per cent.

The advantage in raising the ceiling is that it would help bankers bring down the impact of providing depreciation in their books during the second quarter. The pep talk by the RBI Governor to traders and bankers had an electric effect. At the 91-day T-bills auction last week, yields dropped to 4.71 per cent from the previous week's 4.91 per cent. Unlike the past few weeks, where the issues were undersubscribed, last week the issue was oversubscribed despite the low cut-off yields.

The RBI received bids upwards of Rs 7,000 crore for the auction of Rs 2,000 crore (Rs 1,500 crore under the Market Stabilisation Scheme and Rs 500 crore under the normal auctions). Moreover, in the one-day repo auction towards the weekend, the mop up was Rs 25,330 crore. But for bankers, the one-day repo auction was an arbitrage opportunity, especially during weekends.

The 10-year yield to maturity (YTM) plunged by almost 30 basis points towards the weekend. On a weighted average basis, it ended at 6.16 per cent.

Traders said that despite the firm trend, there was still considerable uncertainty about the sustainability. This was particularly because, the spread between inflation rate and negative real yields have widened considerably. Inflation rate reported last week was 7.94 per cent.

This implied that negative real yields up to 30 years widened from last week, despite marginal fall in inflation.

Volumes were higher. Average trading volumes were upwards of Rs 4,000 crore. Traders said the rise in volumes was partly induced by the large SLR shortfall with some of the banks, including some foreign banks, which had sold anticipating yields to harden.

Moreover, insurance companies were also large buyers. Insurers took the opportunity to push for bargain deals through switches.

Among the securities that some of the banks sold were the 11.60 per cent 2020 at an YTM of 7.29 per cent. As more banks preferred moving towards the short end of the yield curve, insurers, particularly life insurers took advantage of the situation. As a result, trading volumes were heavily weighted towards the short end. ome of the high coupon long-end securities were sold to life insurers at high yields.

Life insurers in turn sold some of the low coupons to banks at very low yields. This was one of the factors that pushed down short yields very steeply. In fact, these switches pushed up the spreads between one year and 24 years to 200 basis points. As a result, bankers were sceptical about the sustainability of the current bond market rally.

Moreover, bankers said that Government borrowings were increasingly becoming bunched into the short end of the yield curve - one-year maturity. Borrowings in dated securities had also dropped about 45 per cent to Rs 54,000 crore.

Further, the Government revenue receipts were unlikely to show big increases, particularly after the series of excise and customs duty reductions on petroleum and steel, which could translate into greater borrowings.

But, bankers said that in the short run, impact was likely to be neutral. This was partly because some of the uncertainties relating to the Budget were overcome.

What could upset is the oil price.. Crude oil prices have dropped to about $44 a barrel or about $325.6 per tonne. This has eased of the pressure on the foreign exchange markets.For the time being however, the oil driven foreign exchange demand has eased off.

But last week's interventions in the market resulted in the foreign exchange reserves being depleted by another $430 million.

Besides, forward premia continued to remain in the high band of 2.8 per cent for three months and 2.3 per cent for six months up to a year.

Traders said that as NRI deposits start coming in, exporters are also likely to bring in their receipts to encash before any big rupee appreciation.

Despite fall in G-Sec yields, corporate bonds continued to remain bearish. This was apparent from the continuing high spreads between corporate and gilts. The spreads ranged between 100 and 125 basis points.

For instance, Hindalco 6.40 per cent 2007 paper was traded at 6.60 per cent, 125 points above the sovereign papers.

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