The Hindu Business Line : Bonds pressured on oil prices, Govt borrowings

Traders said that few were enthused by the Budget. This was because of the increase anticipated in the Government borrowings and a reduction in capital expenditure. Government's market borrowing through dated securities during the next fiscal was estimated at Rs 1,00,836.29 crore, up from the current fiscal's Rs 71,034 crore.

Most of these borrowings were expected to fund revenue expenditure for the next fiscal since capital expenditure has actually been brought down to Rs 27,515 crore, up from the revised estimates of the current fiscal of Rs 47,714 crore.

Direct impact: The worry also stemmed from the fact, that whenever Government had carried out massive reductions in the capital expenditure, it had directly impacted credit offtake in the markets.

But, bankers said that the flip side was that the reduction in capital expenditure was also expected to push several public sector enterprises directly into the markets for meeting their funding requirements, unlike the past. Borrowings by PSUs are estimated at Rs 49,000 crore, which includes foreign currency borrowings and issues of bonds/ debentures.

PSU borrowings: The revised estimate for PSU borrowings for the current year is Rs 29,600 crore.

Besides, traders said that the reintroduction of the 182 Treasury Bill from the next fiscal onwards was also likely to remove liquidity in the markets.

Presently, instruments for combating liquidity surges were the reverse repos, the 91-day T-Bills and the 364-day T-Bills. In addition, flexibility to alter the ceilings and floors for the Cash Reserve Ratio and the Statutory Liquidity Ratio would also help manage the liquidity.

Budgetary impact: However, few traders were certain about the budgetary impact on yields. This uncertainty was reflected in the T-Bill auctions. At the auction, the 91-day yield remained almost steady at 5.21 per cent against the previous week's 5.24 per cent. The 364 T-Bill also remained steady at 5.61 per cent, well within the reverse repo-bank rate, which tends to act as a floor and ceiling.

This stability in T-Bills was also due to the large liquidity inflows driven up by expansion in reserve money flows, particularly due to sterilisation operations.

At the weekend three-day reverse repos, the outstanding was Rs 41,000 crore.

Ten-year yields, however, reflected a different dynamics. On a weighted average basis, yields firmed to 6.67 per cent last week, up from previous week's 6.59 per cent.

Spreads between one year and 10 year widened to 100 basis points, reflecting the uncertainty.

Moreover, traders said the estimated reduction in short-term borrowings also ensured the stability at the short end of the yield curve. Short-term Government borrowings during the next fiscal were expected to fall by over Rs 15,000 crore.

Trading volumes: Average daily trading volumes also dropped sharply to less than Rs 3,000 crore.

Weak outlook for the bond market was evident from the sudden widening of spreads between one year and 23 years. The spread was around 140 basis points last week, up from 125 basis points.

This was despite the widening real yields. Real yields on the basis of inflation, at 4.83 per cent, was slightly less than one per cent, though remained in the positive territory.

Bankers said that this trend was partly on account of the large-scale selling of securities by banks to meet the foreign exchange demand by oil companies.

Oil companies swamped the markets on account of the sudden spike in international oil prices that rose to $53 per barrel.

Besides, country's oil imports have also been rising.

Robust inflows: Foreign exchange inflows also continued to remain robust. Exporters had accelerated their remittances into the country. Besides, inflows in the form of non-debt capital account also continued to remain buoyant.

As a result, foreign exchange reserves rose to a record $135.65 billion, on the back of a $2.7 billion inflow. Some exporters have also begun taking forward cover, pushing down the forward premia.

Six months and 12 months forward premia remained under two per cent and were poised to move down further.

Credit maintained its buoyancy week after week, mainly on account of non-food credit growth. The incremental credit-deposit ratio continued to remain close to 100 per cent.

Interest rates: Traders said that if this growth was sustained, along with large growth in public debt during the year, interest rates were likely to move up beginning from the next financial year onwards.

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