The Hindu Business Line : Liquidity woes, soaring crude pull down bonds

Traders said that last week's meeting between the Reserve Bank of India Governor and the top honchos of major banks was a damp squib, with little assurance of any loosening of the Cash Reserve Ratio. Bankers pushed for a 100 basis point reduction in the CRR. This would have released at least Rs 20,000 crore of liquidity.

Message for banks

But the message banks got was the possibility of a further tightening. The Finance Minister, Mr P. Chidambaram, has sought a further increase in the capital-to-risk-weighted asset ratios to 12 per cent. Currently, the standard is 10 per cent, implying that for every Rs 100 lent, Rs 10 would have to be set aside as capital. Raising the capital requirement standard would accordingly imply that credit availability would tighten, in the event of Finance Minister's suggestion becoming a reality, bankers said.

Bankers' fears of a liquidity crunch, however, failed to show up in the numbers. At the weekend liquidity adjustment facility auctions by the RBI, in both repos (purchase of securities - pumping liquidity) and reverse repos (removing liquidity through sale of securities), the net amount removed was Rs 7,250 crore.

T-bill auctions

Moreover, during the weekly Treasury bill auctions also, the liquidity tightening failed to show up. The cut-off yield on the 91-day T-bill dropped sharply to 6.11 per cent, from the previous week's 6.52 per cent. The weighted average yield was 6.07 per cent last week. A similar pattern followed in the 364-day T-bill yield as well, where the cut-off and weighted yields were 6.42 per cent and 6.41 per cent respectively. Despite this trend, long-term yields failed to react. Last weekend, the 10-year yield to maturity, on a weighted average basis, was 7.47 per cent, up from 7.40 per cent and headed for a three-year high.

Weak undertone

The undertone was weak and the daily volumes remained low at barely Rs 600 crore. Traders said that one of the major reasons for the dip in volumes was the low interest among the banks, the largest holders of government securities. A reduction in their trading interest automatically implied that markets would lose depth. Besides, traders said most of the banks were sellers.

The selling wave had intensified with the inclusion of the recap bonds also in the SLR basket. . If there were buyers, it was mostly the insurance companies. However, even Life Insurance Corporation slowed down its purchases anticipating yields to harden further. The drop in the traded volume has been partly offset by the CBLO market, where settlement volumes were in excess of Rs 15,000 core.

But the CBLO markets have also created some opportunities for market savvy private banks and foreign banks. These banks have used the swap route for arbitraging, leading to a hardening of short-term forward premia, despite the large foreign currency inflows. One-month forward premium was 2.6 per cent, whereas premia for six months to 12 months were under 2 per cent.

But this situation is now likely to lead to difficulties for government borrowings, especially in view of the surfeit of SLR securities with the banks.

Further hardening

Consequently, traders said that dated securities auctions of Rs 89,000 crore during the first half was likely to see a further hardening of yields. This hardening was not necessarily driven by liquidity, but more due to lack of interest among bankers.

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