The Hindu Business Line : Bond yields may stay range-bound

Bankers said that oil companies were also in the market for the purchase of foreign currency, as oil prices slipped off peaks and moved closer to $67 a barrel. Yet, large oil-driven purchases failed to impact either the forex or the debt market significantly. Traders said this was largely on account of the large inflows which more than offset the demand for dollar.

The level of inflows was evident from the continued high level of intervention by the Reserve Bank of India. Last week-end, the RBI mopped up close to Rs 48,000 crore through week-end reverse repos. This was apart the mop-up during the week at close to Rs 8,500 crore in the form of T-bill auctions and issuance of 30-year dated securities. At the 91-day T-bill auction, cut-off yields slipped to 5.16 per cent, down from the previous week's 5.20 per cent. The bids amounted close to Rs 9,000 crore for a notified amount of Rs 4,000 crore, (Rs 3,500 crore under Market Stabilisation Scheme). The response to the 182-day T-bill auction was also identical where the cut-off yields were 5.36 per cent for a notified amount of Rs 1,500 crore. The bids were about Rs 3,500 crore.

For the auctions of the 7 per cent 2035 paper, the yield-to-maturity (YTM) was fixed at 7.4 per cent. This YTM was lower than the 23- and 29-year papers. But bankers said that none of them pitched for this 30-paper. Instead, life insurers, including the Life Insurance Corporation of India, picked the entire lot.

Given the high liquidity, bankers are now speculating about the possibility of stronger interventions. Yet, the high liquidity had little impact on the 10-year YTM. The 10-year YTM was 7.09 per cent on a weighted average basis last week, down only marginally from 7.10 per cent the previous week.

In fact, even the Government's announcement of Rs 5,762 crore of 7 per cent 2012 oil bonds to compensate refineries failed to impact the yields. The coupons on these bonds are about 30 basis points more than that of comparable sovereign securities.

The outlook for the markets remained flat. This outlook was apparent from the thin trading volumes at less than Rs 2,000 crore per day during the week. Moreover, spreads between one year and 23 years were just 175 basis points, almost identical to the previous week's level of 172 basis points. This trend was also partly on account of the absence of life insurers from the market. They were more active in the equity markets attempting to unload some of their portfolios to beef up their solvency margins, traders said.

Besides, bankers said, with inflation down to 3.01 per cent, the real yields for one year were up to 2.5 per cent, 50 basis points above internationally accepted levels. As a result, there was little scope for yields to rise.

But traders said that there was also very little flexibility for yields to soften in the coming weeks, because few banks were interested in pushing up their investment portfolios. Investment-deposit ratios are currently at about 41 per cent. Instead, the focus was to bring down the ratios closer to the Statutory Liquidity ratio of 25 per cent. Derisking or shrinking the average maturity of the portfolio was just one reason. Another reason was that some of the banks were preparing for the implementation of Basel 2 norms for market risks expected to come into effect from the next financial year. This would mean that they would have make greater provisions for market risk. Most bankers indicate that the securities in the held-to-maturity (HTM) category would be kept out of the provision of market risk.

Consequently, bankers' focus was to reduce the quantum of securities in the "Available for sale" and the "Held for trading" categories. But even in the HTM categories most banks had already shrunk the maturity of the investment portfolios to less than 5 years as part of derisking process.

Anticipation therefore was for yields to remain range-bound for some more time. This was because liquidity from foreign currency expansion was likely to exert pressure for softer yields. In fact, these levels of inflows were evident from the low forward premia. Forward premia across maturities were just 0.6 per cent. Even short-term premia was low at 0.15 per cent. Traders said that the premia continued to be low despite the fact that the India Millennium Deposits were due for redemption during the course of the month. For the latest reporting week accretions to the foreign exchange reserves were about $1.714 billion.

The focus of bankers was credit. Liquidation of investment portfolios or raising funds through collateralised borrowings was becoming the favoured route. In fact, bankers said that this was one of the major factors driving up incremental credit deposit ratios. Incremental credit deposit ratios are close to about 130 per cent though the nominal ratios are about 64 per cent. But these methods are unlikely to sustain the credit growth momentum and bankers said that they would have to push up deposit rates further to accelerate time deposit accretions, especially for the long term.

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