The Hindu Business Line : Banks book big treasury profits in March

Bankers said the arbitrage opportunities opened up when the 91-day Treasury bill yields rose over the repo rate of 6.5 per cent. The repo or the repurchase is the rate at which banks borrow from the Reserve Bank of India's shorter-term window by placing Government securities.

Barring the last week of March, the cut-off yields on T-bills had remained close to 6.7 per cent or about 20 basis points above the repo rate. This had allowed banks to borrow from the repo window and park in 91-day T-bills. What had also made the situation advantageous was that throughout the month, most of them had taken the position there would be no mid-term hike in the repo rates. This had allowed bankers to reverse the drop in treasury income witnessed since the third quarter of 2004.

Arbitraging in forex

But the more market-savvy banks have also moved one step further. They used the foreign exchange markets for arbitraging, the sources said. This involved swapping of foreign currency in two legs. The first leg involved selling the cash dollars for rupees.

The second leg involved buying back the dollars at a future date anywhere between three days or up to a month. Some have even taken advantage of the RBI's reverse repo window generating spreads of over 100 basis points in the process.

In fact, bankers said this was also one of the major reasons for the firm short-term premia upwards of close to 2.5 per cent and leading to an inverted forward premium curve, high at the short-end and low at the long-end. These kinds of operations had resulted in the spot rupee strengthening against the dollar by about 3.5 per cent since December 2005.

CBLO route

The sources said that many of the foreign banks had also parked funds in the T-bills and in the Collateralised Borrowing and Lending Obligations (CBLO) market for booking profits. CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to one year as per the RBI guidelines. This involved providing securities, usually Government securities as collateral for the funds.

Bankers said that with CBLO rates reaching close to 7 per cent, many of the banks had taken this route for lending operations.

The bankers said the preferred instruments for the CBLO's by the lenders were mostly T-bills, particularly 91-day, in view of their high liquidity. Even at 7 per cent this was a cheap source of funds, since CBLO based borrowings are exempted from CRR.

Banks that booked treasury profits through this route included large domestic private sector banks, with highly skilled treasury desks.

Bankers said some of these borrowers, particularly public sector banks had used the CBLO route for meeting their credit requirements.

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