The Hindu Business Line : Traders expect higher yields; defer purchases

What also contributed to the tightness in the markets during the week was the advance tax collections and the continuing presence of oil companies, who are now big borrowers for meeting import requirements.

Bankers said that most oil companies were fully drawing on their credit lines.

Oil companies are operating on negative margins, since the weighted average cost of products was lower than the import parity price.

International crude prices are currently $64 a barrel and the weighted average import price for oil companies was upwards of $55.

Liquidity tight: The tight liquidity has also driven some of the banks to resort to the repo window.

At the 3-day repo auction, bankers drew Rs 19,450 crore. The tightness also ensured that the yields at the 91-day Treasury bill auctions remained high.

At the weekly 91-day T-bill auctions, the cut-off yields were 6.56 per cent, unchanged from the previous week.

Last week again, there were no takers for the 182-day T-bills. In fact, the RBI rejected all the bids during the auctions. Traders said the reason was that most of the bids were around 6.80 per cent.

In fact, the preference was more on the 91-day T-bills. The one-year yield to maturity (YTM) rose to 7.24 per cent on a weighted average basis.

Weak undertone: The undertone in the markets was weak as life insurance companies, in particular LIC, and mutual funds largely stayed away. Even provident funds stayed away.

Traders said most of them preferred to defer their purchases in anticipation of hardening yields, evident from the low trading volumes, which remained under Rs 1,000 crore.

On most days, volumes were less

than Rs 500 crore. The inter-tenor spreads continued to drop, indicating a flattening of the yield curve.

The spread between one year and 29 years was now just about 75 basis points.

A flat yield curve implied that credit offtake was slowing down, which is not a very good long-term sign for the economy.

Rising real yields: But real yields continued to rise, triggered by a deceleration in inflation and a rise in one-year yields, which were at 2.54 per cent, indicative of the tight liquidity situation.

Bankers said this situation was likely to worsen when the advance tax payments begin and the government goes ahead with its planned Rs 9,000-crore borrowings.

In addition, another round of borrowings is also expected from the oil companies, evident from the firm forward premia for up to three months. The three-month forward premia continued to remain close to 3 per cent.

In fact, oil-driven borrowings, bankers said, were one of the major factors for high credit-deposit ratios of banks.

Most banks had already reached their exposure limits for some of the public sector oil companies.

This would make borrowings difficult for oil companies.

Credit offtake: In addition, credit offtake from the retail sector also remained buoyant. This ensured that incremental credit-deposit ratios for banks remained above 100 per cent.

In some cases, the ratios were well over 125 per cent, indicating that a further hardening of rates appeared inevitable.

Insufficient inflows: What also made the situation difficult was the inadequate inflows of reserve money.

Most exporters have deferred their inward remittances anticipating a weakening of exchange rates, evident from the high forward premia.

Bankers said there was a slowdown in inflows from institutional investors, as most of them anticipated a further rise in yields in their home turfs, in particular dollar interest rates.

Tight liquidity has triggered a rush for deposits by banks. Deposit mop-ups were beginning to witness intense competition, especially on bulk deposits.

Bankers said that some of them were prepared to offer rates up to 7.65 per cent on 90-day deposits, especially on amount above Rs 100 crore.

Bulk deposits: Bankers' preference for large bulk deposits was on account of the call rates ruling around 7.5 per cent.

Some of the private sector banks were offering above 8 per cent on some of the certificates of deposits.

The high rates were being offered to tide over their immediate liquidity mismatches driven by lending long and borrowings short.

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