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Monday, Nov 01, 2004

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Banks may offload more securities

C. Shivkumar

Most banks are in the process of bringing down their overall investment portfolios close to the prescribed statutory liquidity ratio of 25 per cent.

BONDS' yields rose sharply during the week after the Reserve Bank of India signalled the possibility of a hardening interest rate regime in the coming months.

Last week, the RBI hiked the reverse repurchase rate by 25 basis points (0.25 per cent) to 4.75 per cent. This is the rate at which the RBI intervenes to remove excess liquidity in the financial markets. Few of them had anticipated the rates to be increased this fast.

Cut-off yields: The surprise was evident from the steep rise in the yields of 91-day T-bills. The cut-off yields rose to 5.37 per cent, up 17 basis points over the previous week. However, the weighted average yields were slightly lower at 5.33 per cent. Bankers said that this was partly because of non-competitive bids from private sector insurance companies. Private sector insurers have begun derisking their unit-linked portfolios and moving to the shorter maturity securities.

The yields on the 364-day T-bills during the last week's auctions went up sharply to 5.69 per cent, from 5.49 per cent. That the bias was more in favour of short-dated papers was evident from the wide spreads between the 91-day and the 364-day T-bills. The spreads between these two papers that were barely 5-10 basis points in April were about 32 basis points last week.

Short-dated papers: The shift to interest in short-dated papers also became apparent from the sharp fall in the 10-year yield to maturity (YTM). The 10-year YTM rose to 6.97 per cent on a weighted average basis, up from previous week's 6.71 per cent. It is likely to breach the 7 per cent ceiling.

Weak undertone: The undertone after the announcement of the Credit Policy also remained weak, evident from the fall in trading volumes. Daily average trades were just slightly above Rs 2,000 crore, down from the previous week's average of around Rs 3,000 crore. Besides, the spread between one-year and 24 years also remained wide. This spread was 145 basis points.

The reason for the wide spread was partly because several banks and mutual funds were beginning to derisk their portfolios and bring down the average maturity of their marked to market investments to about a year.

Mr Shailendra Bhandari, Managing Director of Centurion Bank said, "We expect markets to tighten and therefore it is better to reduce the maturity of the investment portfolios." Centurion Bank has brought the maturity to just one year.

Focus on low coupons: As a result, most banks were sellers in long dated securities. Besides, some banks also transferred low coupon securities, likely to incur large depreciation to the `held to maturity' category.

Most banks are in the process of bringing down their overall investment portfolios close to the prescribed statutory liquidity ratio of 25 per cent. This would now mean that in the coming weeks there could be more sellers.

Insurers stay away: What was leading to some anxiety among the traders was the absence of both life and non-life insurance companies in the securities markets.

In fact, none of the insurers appear to be currently interested in purchasing securities. This implied that insurers expected the yields to harden further.

Most of them, in the mean time, preferred holding cash balances and time their purchases when rise in yields had peaked.

The surge in demand deposits in the banking system was partly due to life insurers holding more cash balances than move into the G-Secs market.

Traders said that the reason for insurers' stance was led by RBI's revised inflation target of 6.5 per cent.

NTPC issue refunds: Traders said the refunds of the NTPC public issue had not begun. They expect the entry of Life Insurance Corporation to buy securities when the refunds begin. This would allow the country's biggest insurer to pick up securities at the highest yields, especially some of the high coupon securities.

Among the high coupon securities targeted by the insurer include the 9.85 per cent 2015. Some banks have already moved into the `available for sale' category.

Forex demand: Further, foreign exchange demand was likely to pick up in the coming weeks, as oil companies were expected to take advantage of the blip in the oil prices. But some companies have already begun taking forward covers. Short forward premia was above three per cent for one month whereas at the long end, it was about 2.5 per cent.

The premia spread between the short and long ends were also beginning to narrow. This implied that more oil companies were beginning to take covers at the long ends.

The widening forward premia however, was also partly on account of the deficit in the inflows. Current and non-debt account inflows were barely $80-100 million a day this week.

Foreign Direct Investments: Besides, foreign direct investment flows would also begin to flow in the long run. Some capital flows have already begun; non-resident Indians anticipating a slew of initial public offerings have repatriated funds into the country. This has lead to jump in the foreign exchange reserves by $980 million to over $120.616 billion. The inflows have triggered some optimism among bankers that the year-end would still see yields remaining stable. Mr K.V. Hegde, General Manager (Investment) of Canara Bank said, "We expect to see 10 year yields to remain ranged."

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