The Hindu Business Line : NTPC issue inflows help bonds rally

Traders said that the large-scale inflows for the subscription of the initial public offering of NTPC contributed to the buoyancy. Traders said that the sudden rush of the Qualified Institutional Bidders (QIBs) for the NTPC issue changed the situation in the markets.

QIBs and NRIs traditionally approach only in the last minute. As a result, there was sudden surge of liquidity in the markets,

That the inflows contributed substantially to the rally was evident from the trend in the T-bill and the dated security auctions. The auctions took place well before the QIB inflows.

At the 91-day T-bill auction, the cut-off yield was fixed at 5.16 per cent, up from the previous week's 5.08 per cent.

At the 364 day T-bill auction, the cut-off yield was 5.49 per cent, up 11 basis points from the previous auctions. Similarly, at the auctions of the 7.38 per cent 2015, a reissued security, the cut-off was fixed at 6.99 per cent, way ahead of the market expectation.

In fact, this is the next 10- year benchmark security and markets had believed that the yields would be fixed lower. However, the hint of a higher yield fixing came when the RBI set an underwriting commission for the security at 21 paise.

The effective yield on this security was slightly more than 7 per cent.

As a result of the high cut-off yield for the 7.38 per cent security, 10-year yields moved closer to 7 per cent during the week on a weighted average basis.

However, NTPC issue effect pushed down 10-year yields down to 6.76 per cent, up from the previous weekend's level of 6.85

Despite the rally undertone in the bond markets remained weak, evident from the low trading volumes. Daily trading volumes were barely Rs 3,500 crore during the week.

The inter-tenor spreads also remained more or less steady at 160 basis points.

However, traders expect a reversal in the rally shortly. This was partly because refunds for NTPC shares are expected to begin soon.

Real yields negative: Real yields continue to be negative despite the retreat in inflationto 7.2 per cent. Traders said foreign exchange flows were far short of demand, tightening the liquidity situation. The demand was entirely on the oil account, where international prices had reached $55 a barrel.

Forward cover: In fact, oil companies have already started taking forward cover ifor up to 6 months, leading to marginal rise in the forward premium to about 2.5 per cent. Further hardening of yields could be expected in the coming weeks, unless there is a price retreat.

Oil companies' appetite for foreign currency has picked up which was evident from the low accretions in the foreign exchange reserves.Foreign exchange reserves rose by $20 million.

The depletions in the reserves would have been large but for the FDI inflows beginning to trickle in.

Exporters were, however, deferring their inward remittances in anticipation of a further weakening of the rupee and a hardening of the forward premia.

This was one major factor contributing to an inflated deficit on the trade account.

Besides, traders said there were also fears, that if the Government resorted to duty cuts on petroleum products, revenues would likely be impacted, leading to more borrowings.

Besides, inflationary impact of the higher oil prices was also expected to translate into greater revenue expenditure for the Centre and the States.

Govt borrowings: Accordingly, most bankers are anticipating the borrowings for the current year to exceed the target.

Already, with another five months to go, about 70 per cent of the borrowing targets have already been completed, while the revenues still behind target.

Besides, traders said, that the with higher borrowings being made at higher coupon rates, interest expenditure is also expected to move up sharply along with the slow down in revenue receipts, leading to a slippage in the revenue deficit target.

Credit offtake: Further, credit has also been expanding during the last few weeks. Bankers were funding this credit through sale of securities, traders said, instead of building up liabilities. Part of the large credit increase was retail.

In fact, the retail segment contributed approximately 30 per cent of the incremental credit growth.

Last week, non-food credit growth was Rs 16,000 crore. Corporate credit offtake had also improved.

Most corporates were working out term loans for their future requirement in anticipation of hardening interest rates, bankers said.

Some big corporates are quietly beginning to opt out of foreign currency borrowings as well.

The reason is with international rates under pressure, the spreads over Libor for domestic companies are also on the rise.

This would make borrowings in the domestic market far more attractive with interest rates still at about 8-9 per cent for long-term loans.