The Hindu Business Line : Yields harden on high oil prices, profit-booking

Traders said that oil companies were active with the slight reversal in oil prices. Besides, oil companies are also becoming large borrowers in the markets due to large under recoveries. Currently, international crude prices are $72 a barrel though intra-week they had touched $75 a barrel. Current international prices translated into a basket import price of close to $490 a tonne for domestic refiners.

T-Bill yields

The high oil prices and large borrowings by the oil companies failed to impact the Treasury bill auctions. Yields on the 91-day Treasury bills remained steady at 5.41 per cent for the second consecutive week, though on a weighted average it dropped to 5.36 per cent. The widening gap between the cut-off and the weighted average yields indicated that the markets would continue to be deluged by liquidity from current and non-debt capital account inward flows. This pushed down the forward premium to 1.25 per cent for one month. Six months to 12 months were 1.20 per cent.

This trend reflected in the 364 T-bill auctions where the cut-off yield was 5.90 and the weighted average yield was 5.77. The liquidity prompted the RBI to reintroduce the market stabilisation scheme (MSS). This was to help in the sterilisation operations of the RBI and ensure that yields remained grooved between the current repo and reverse repo rates. At the week-end liquidity adjustment facility auctions, the RBI mopped up over Rs 47,000 crore through four-day reverse repos.

Traders said despite the high liquidity The ten-year YTM was 7.43 per cent last week went up slightly from the previous week's 7.42 per cent. Apart from profit-booking, what also contributed to the hardening of yields was the uptick in inflation to 3.55 per cent. The one-year real yields, however, retreated slightly to 2.7 per cent, down 20 basis points over the previous week.

The undertone weakened as a result of high oil prices, advancing inflation and the announcement of an RBI intervention through the MSS. This was evident from the high bid-offer spreads. The spreads at the long end was as high as 15 basis points, clearly indicating there was little interest in trading. The drop in trading interest was refelcted in the daily trade volumes that shrank to barely Rs 1,000 crore.

Bankers, however, said that this trend was likely to reverse. This was particularly because most of them would require to push up their statutory liquidity ratio (SLR) in line with their deposit accretions. The SLR for the banking sector currently average around 28 per cent, though some of them are already in 25 per cent zone. Consequently, traders said that yields were likely to remain ranged. This was despite the high investment deposit ratio of 37 per cent. Already the incremental ID ratios are below 25 per cent.

Purchases, traders said, were likely to take place only at the short-end for liquidity purposes. As a result, yield spreads between one year and 29 years remained wide. This spread last week was 188 basis points. The previous week, there were indications that this was narrowing when the spread had fallen to 176 basis points. Bankers said the wide yield spreads was partly driven by absence of buying interest from insurance companies, in particular Life Insurance Corporation.

Bulk deposits

Life insurers after booking profits from the equity market have opted to maintain the profits realised as cash balances with banks in the form of bulk deposits. For such bulk deposits, bankers were paying rates in excess of 8 per cent. This was far higher than the YTMs on their existing portfolios. This was also one of major factors that pushed up the bank deposits by Rs 25,000 crore, both time and demand for the latest reporting week. Bankers said that this was expected to drive demand for SLR securities in the coming weeks as they also accelerate their retail deposit mobilisation efforts.