The Hindu Business Line : Volatile crude, stock market trends — Bond traders prefer to `wait and watch'

Traders said that several foreign institutional investors were expected to make their exit, ahead of their year-end. Besides, oil markets after a week of stability again turned volatile driving some of the oil companies to cover their import requirements.

Already, markets are rife with rumours over a default in Nigerian shipments, which has forced some of the refineries to tap the spot markets.

T-bill auctions: Despite these trends, traders said most of them preferred to wait and watch. As a result, during the 91-day T-bill yield auctions last week, the yields were 5.28 per cent, down sharply from previous week's 5.62 per cent.

At the 364-day T-bill auctions, it was also down to 5.68 per cent.

One of the major reasons for this trend was the influx of short- term liquidity into the banking system after several banks hiked deposit rates at the short end, traders said.

During the weekend, few banks took to the repo window of the RBI. In fact, most of the banks rushed to the reverse repo window, where there were able to realise a spread of at least 50 to 75 basis points on their short term funds.

The weekend reverse repos saw an outstanding of almost Rs 5,600 crore.

Wide spreads: Traders said this was also one of the reasons for the wide spreads between the 91-day and the 364-day T-bills. This spread was 40 basis points, indicating that traders remained nervous, evident from the 10-year yield to maturity last weekend. The ten-year YTM was 7.20 per cent.

Nervousness was also evident from low trading volumes. Daily trade volumes remained at about Rs 3,000 crore, indicative of poor interest in the bond markets.

Besides, low volumes were also triggered by the pullout of insurers from the markets. In fact, the only large presence in the debt and equity markets was Life Insurance Corporation. LIC has been stocking up high coupon securities and has entered the markets to book current yields.

Inflation data: What came as a small boost to traders was the drop in inflation numbers. However, traders said that this fall was partly technical. The fall also led to a narrowing of real yields. Real yields, however, were positive from 10 years onwards.

The inflation outlook remained bearish with oil futures topping $50 a barrel.

Moreover, not many traders expect the present stability in yields to be sustained. The first reason for the fear was the rapid build up of foreign currency inflows from FIIs and other foreign institutions.

Forex inflows this year was close to about $5 billion on account of FIIs, unlike in the past when the inflows were driven by current account and less volatile capital account items.

Forex reserves: As a result, forex exchange reserves topped $125 billion. But the reason for the rise was also due to the impact of the dollar's depreciation against the euro.

In fact, at least 20 per cent of the reserves are estimated to be in the form of non-dollar currencies, especially the pound sterling and the euro, both of which have appreciated.

Besides, the RBI's gold reserves have also appreciated in value

Besides, credit demand remained on the uptrend. The credit-deposit ratio for the banking industry remained close to 63 per cent, a five year high. But some of the banks, especially private and foreign banks were operating at CD ratios as high as 80 per cent, traders said.

In fact, bankers were offloading zero risk-weighted investments and substituting them with risk-weighted securities. One major reason for this trend was to offset the impact of depreciation of their investments. Besides, the shift was also triggered by the need to push up their average yield on assets investments.

The high investment-deposit ratios had lead to a sharp drop in the average yield on assets to as low as 7 per cent for most of the banks. Bankers said that this figure was not sustainable in a situation where interest rates were poised to rise and dividend expectations remained.

As a result, most banking institutions were attempting to offload some of the G-Secs.

New trends: Some new trends were also beginning to take place in the markets. Some banks were offering to exchange G-Secs with banks faced with SLR (statutory liquidity ratio) shortfalls during reporting weeks through ready forward deals. Among the banks adopting such deals, included some of the foreign banks.

Traders said that some of the foreign banks were also bringing in dollar borrowings from their parent or other branches for swapping into domestic currencies and taking advantage of the high credit demand.

Bankers were taking advantage due to the low forward premia (under one per cent between six months and one year) prevailing in the markets.

This trend has not yet translated into largescale borrowings by private sector banks.

Many are scared of mismatches and the damage that it could cause especially in the case of interest rate volatility.