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C. Shivkumar

Credit offtake on ascent, bankers resorting to increasing liabilities

Bangalore , May 21

Bonds plunged on mounting concerns over a possible conflict in West Asia and large-scale exit by foreign institutional investors.

Banks said equity sales by FIIs triggered a hardening of yields. FII equity sales normally spark off foreign currency demand simultaneously.

Besides, oil companies were also in the spot markets sourcing foreign currency for maturing crude oil delivery contracts. Oil prices continued to be close to about $70 a barrel.

Yet this failed to impact the liquidity adjustment facility auctions. At the three-day weekend LAF auctions the RBI mopped up close to Rs 61,000 crore.

This flow was led by large-scale inward remittances by exporters who took advantage of the exchange rate drop. Some even cancelled their forward contracts for spot to take advantage of the high spots rates, since forward premiums were low. This liquidity did not impact the Treasury Bill auctions either. The cut-off yield on the 91-day T-Bill auction remained at 5.65 per cent at the same level as the previous week. The yield 182 T-bill though moved up to 6.25 per cent. In both these cases the market stabilisation components were fully subscribed. However, the 10-year yield to maturity moved up further. On a weighted average basis, the 10-year YTM was 7.62 per cent last week, the highest level since 2003. In the previous week, the 10-year YTM was 7.55 per cent.

Low trade volumes

That the undertone was weak was evident from the low trade volumes. Trade volumes dropped to just Rs 250 crore towards the weekend in view of the large number of sellers and absence of buyers. Besides buy-sell spreads also widened across all maturities. These spreads were as high as 40 basis points in the long-term securities, indicating low purchase interests.

Bankers said that even insurance companies were sellers for building liquidity to enter the equity markets when it bottoms out. The weakness in the markets was also partly on account of an up tick in inflation to 3.96 per cent. This pushed the one-year real yields down to 2.54 per cent, from the previous week's 2.77 per cent.

But the weakness in the bond markets was likely to continue for some more time, bankers said. This is on account of the rise in US yields. One year US yields are currently 5.10 per cent and likely to move up further.

Consequently, some of the institutional investors have preferred to remain liquid so as to take advantage of the increased US yields as and when they moved up. But countries such as India are also taking advantage of the situation and becoming liquid.

In March, India sold large volumes and swapped to short-term securities to avert depreciation losses.

Besides credit offtake continuously on ascent, bankers are resorting to increasing liabilities, through certificates of deposits or bulk deposits from corporates. Such funds were being raised at rates as high 9 per cent by some of the private sector banks to fund their credit requirements.

Amendment to RBI ACT

Bankers said the new amendment to the Reserve Bank of India Act was likely to have an impact on the Statutory Liquidity Ratios of banks.

Bankers said that SLR was likely to come down further from the current levels. This was in view of the drop in government borrowings.

Instead this would allow for greater credit availability, as pre-emption of bank funds drops. Already banks are operating at credit deposit ratios of 70 per cent.

A reduced pre-emption would allow them to operate on slightly higher ratios. This was also essentially to improve the credit, especially farm credit to GDP ratios. Farm credit is the focus since their net interest margins are likely to be driven by the sector.

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