The Hindu Business Line : Securities may see range-bound movement

Bankers said that the presence of oil companies in the foreign exchange markets also pushed up the yields. Oil companies were active with large-scale purchases, after the price of crude oil in the global markets tested $57 level and Dubai crude quoting over $51 per barrel.

The Dubai prices are more relevant to the country, since the bulk of the oil imports are sour crude (high sulphur content). The spike in the Dubai prices implied that the weighted average cost of crude imports was over $50 a barrel.

Besides, traders said, some of the foreign institutional investors were also selling in the equity markets to remain liquid ahead of a possible hike in the US Fed fund rates by another 25 basis points. The Federal Open Market Committee is due to meet shortly. Traders said that this prompted institutions such as the Life Insurance Corporation to sell some of their holdings to support the equity markets.

But bankers said that some of the insurers did not sell any of the high-coupon securities. Instead, some insurers switched their low coupon securities with high coupon ones. Further, some insurers also resorted to ready forward deals in a bid to raise the liquidity for propping the equity markets, traders said.

As a result of this demand for liquidity, bankers said, the mop-up at the weekend reverse repo auctions dropped below Rs 10,000 crore.

Liquidity tightening: Besides, tightening liquidity during the week was reflected in the hardening Treasury bill yields. At the auctions, the 91-day T-bill was 5.32 per cent, up from the previous week's 5.24 per cent. The yield on the 182-day T-bill auction was 5.40 per cent, up from the previous auction level of 5.35 per cent. The spread between 91-day and the 182-day yields also narrowed last week. This spread was eight basis points, as against the normal 20 basis points.

Fading interest: Bankers said that this narrowing of the spread was partly because most traders were beginning to lose interest in the 91-day T-bill for investment purposes. In fact, the preferred paper was the higher yielding 182-day T-bills. Among the institutions that evinced interest in this paper were corporates, non-banking finance companies and some urban co-operative banks that have now been permitted into the ready forward market.

Hardening yields on the short-term papers were further evidence of a tightening liquidity situation, they said.

Reflecting this trend, the 10-year yield to maturity (YTM) on a weighted average basis rose to 7.06 per cent last week, up from the previous week's level of 6.98 per cent.

Bankers have ruled out any major hardening during the month. In fact, the trends were mixed.

Trading volumes: Daily trading volumes remained low at about Rs 3,000 crore during the week. On the other hand, the spreads between one and 23 years dropped to 165 basis points, down from 170 basis points the previous week. Bankers said that this signalled that bond yields were likely to remain ranged at the current levels.

Moreover, real yields widened on the back of retreating inflation. Inflation as measured by the wholesale price index was 4.22 per cent. Based on this, the one-year real yield was close to 1.4 per cent, near the internationally acceptable real yields.

Few banks are willing to enter the bond markets on a large scale, the reason being their unwillingness to buy long tenure securities in view of the high credit growth.

Short-tenure bonds: Consequently any preference, traders said, were likely to be confined to the short tenure bonds.

This would imply that there could be some switches between insurance companies and the banks in the coming weeks.

Since banks have a high preference for liquid securities, some of the newer securities are expected to be witnessing softening yields, as the life insurers drive hard bargains for these switches.

The preferred securities for switches include the 6.65 per cent 2009, which was offloaded at 6.51 per cent, and the 10.25 per cent 2021 at 7.39 per cent.

Traders said banks preferred to derisk, sticking to an average tenure of about three years.

And, not many banks were interested in securities, with the investment-deposit ratio currently at about 44 per cent, well above the statutory liquidity ratio requirements of 25 per cent.

Nominal credit-deposit (CD) ratios were 65 per cent. Incremental CD ratios remained close to 100 per cent for the banking system, indicative of the high credit demand.

Credit offtake: The non- food credit offtake was quite strong, mostly in the form of corporate credit. If this trend continued, traders said yields could move up few notches.

Moreover, forex reserves continued to drop by $135 million to $138.526 billion.

This was largely driven by oil prices and FII withdrawals. This trend, however, failed to impact forward premia, as current account receipts were expected to offset the short-term withdrawals.

Declining reserves: The falling reserves and the mounting credit demand are likely to impact lending rates.

Already, housing and retail lending rates have been hiked by some of the institutions.

Banks could follow suit, though it may take some time before the prime lending rates are revised.

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