Business Daily from THE HINDU group of publications
Saturday, Jan 13, 2007
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Business Daily from THE HINDU group of publications Saturday, Jan 13, 2007 ePaper |
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Financial Markets Money & Banking - Debt Market Government - Financial Policy Bond prices crash by Rs 2 Our Bureau
The `massacre' A lower SLR means less demand for Government securities. Yields harden by as much as 30 basis points. Lower cut-off at RBI auctions also unsettles players
Mumbai , Jan. 12 The bears ruled over the bond market as prices crashed by more than Rs 2 on Friday following reports that the RBI would be given the flexibility to set the statutory liquidity ratio for banks. Bankers said that hardening interest rates could, however, now see some stability. Currently, banks are required to maintain at least 25 per cent of the deposits under SLR by investing in government securities. SLR is the ratio of liquid assets to demand and time liabilities. News of the scrapping of the floor rate for SLR led to a `massacre' in the bond market. Prices tumbled by over Rs 2 and yields hardened by 30 basis points. "A lower SLR requirement will mean that there will be less demand from banks for Government securities," said a senior treasury official. Traders said the last time bond yields had hardened by 50 basis points was in July 2000. On Friday, the benchmark 8.07 per cent-10 year-2017 paper opened at Rs 102.85 (7.65) and closed at Rs 101.60 (7.84 per cent YTM), down from the previous close at Rs 103.78 (7.52 per cent YTM). The 7.59 per cent-9 year-2016 paper crashed to Rs 98.48 (7.82 per cent YTM), against Thursday's Rs 100.35 (7.53 per cent YTM).
Lower cut-off
Market participants were also disturbed by the RBI's cut-off price for the auction of the 8.33 per cent - 29 year-2036 paper for Rs 4,000 crore which at Rs 101 (8.24 per cent YTM) was lower than the market expectation of Rs 104. The hike in the cash reserve ratio to 5.50 per cent had created a strain on liquidity. Banks' SLR holdings are now slightly above the mandatory 25 per cent as money is now a scarce commodity. The move to do away with a floor rate for SLR has, however, been welcomed by bankers, who say that it will help improve profitability. "Banks will now be able to deploy more deposits and raise credit which will in turn increase profitability. The pressure on liquidity for the corporate sector will ease and it will help in stabilising interest rates," said Mr V. Sridhar, Chairman and Managing Director, UCO Bank. "The depreciation in the returns on our Government securities portfolio will, however, neutralise the profits," Mr Sridhar added. For banks, the returns on advances would be higher than if it were invested in Government securities. "It is a welcome move and we are hoping that the SLR will be reduced from the current levels of 25 per cent. This will improve the quality of earnings," said Dr P.J. Nayak, Chairman and Managing Director, UTI Bank. "The move will certainly improve the liquidity as banks will have larger proportion of funds to use. It will give flexibility to the commercial banks and lead to a rise in credit," said Mr K. Ramakrishnan, Chairman and Managing Director, Andhra bank. With the rise in cost of funds, it was getting difficult for banks to raise deposits to fund their credit growth, he added.
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