The Hindu Business Line : Bond volumes rise on insurers' purchases

Traders, however, said there was a marked improvement in the liquidity situation after the Budget, evident from the low recourse to the repo window of the RBI.

At the three-day weekend repo auction, drawdown was a little above Rs 1,000 crore, indicating that some banks had switched over to other options for liquidity, including deposits.

Deposit rates are beginning to move up across all maturities and most banks have hiked it by at least 50 basis points during the last few weeks.

Bankers said more liquidity build-up was likely, partly on account of the greater depth provided to debt trading with the participation of insurance companies, provident funds, mutual funds and pension funds at the NDS window, as permitted by the Finance Minister.

Despite this, few insurers have actually stepped directly into dealing. Traders said their participation would take a few weeks before impacting the markets.

T-Bill yields

As a result of this lag, the yields on 91-day and the 364-day auctions remained firm. The cut-off yield on the 91-day T-Bill was 6.69 per cent last week, unchanged from the previous week.

The 364-day T-Bill was 6.80 per cent.

But the 10-year yield to maturity firmed further on a weighted average basis to 7.39 per cent, up from the previous week's 7.37 per cent.

Despite the hardening of yields, a technical correction appeared to be in the making, evident from the sudden surge in trade volumes of close to Rs 1,400 crore.

Rise in volumes

The rise in volumes was triggered by purchases made by insurance companies with yields rising.

Besides, mutual funds, provident funds and pension funds are also expected to source their government securities investments through the NDS window.

FIIs, though, are unlikely to make any big entry into the G-Secs, because yields are still far from attractive and equity is likely to remain their focus, traders said.

But provident funds and pension funds, traditionally long-term investors, were in the markets for picking up securities such as the 10.45 per cent 2018 at 7.46 per cent. Banks are likely to stay away since some of their holdings of recapitalisation bonds were being converted into SLR securities.

This would result in pushing up their SLR ratios very close to the investment-deposit ratio of 36 per cent.

Liquidity build-up

What also makes a correction imminent is the liquidity build-up taking place through accretion of reserve money in the banking system from large foreign exchange inflows.

For the latest reporting week, forex reserves went up by $350 million to $141.59 billion.

The accretions would have been larger but for oil companies' presence.

Oil companies have pushed up forward premia up to five months close to 3.25 per cent. The shortage of cash dollars, however, pushed up short-term premia close to 4 per cent. Bankers said that net inflows were likely to result in slight softening of short-term yields in the coming weeks.

Moreover, real yields for one year are close to 3 per cent with inflation on the retreat, bankers said.

Besides, government borrowings for the current fiscal are estimated to be lower than the Budget estimates and some liquidity was expected to be released into the markets.

Government borrowing, estimated for the current year, was Rs 1,51,144 crore, but the revised estimates have scaled it down by Rs 5,000 crore.

Credit offtake

The lower borrowing is unlikely to see any sharp falls in yields, since credit offtake continues to be high.

Banks are operating at credit-deposit ratios of over 70 per cent and incremental ratio of 74 per cent.

The retreat in the incremental CD ratios was partly on account of increased accretion in deposits, a trend likely to continue with the new tax sops extended to five-year term deposits.