The Hindu Business Line : Bonds remain listless in thin trading

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Bangalore Jan. 28 Bonds remained listless through last week in thin trading as inflation and the escalating tension in West Asia worried markets.

Traders said that the insurers, particularly life insurance companies, were buyers. They said only the life insurance companies tend to purchase large volumes.

What also influenced bonds during the week was the resurgence in international oil prices. This was largely on account of escalating tensions and the rising pitch of rhetoric between Iran and the US.

As a result, the markets were nervous and oil prices firmed to a little over $55.5 a barrel. But traders said that few domestic oil companies were likely to be impacted. Most of them had already hedged their forward imports. Besides, some of them had also stocked for eventualities in the Gulf. Nevertheless, at current international prices, the weighted average basket price was over $50 a barrel, after briefly falling below this level, 10 days ago.

Besides, credit demand also continued to remain high, maintaining an average of 30 per cent growth rate.

This was despite the clampdown on real estate and retail loans by the Reserve Bank of India. But a large part of credit off-take was driven by corporate, farm and energy sectors drawing on their credit lines with the banks. As a result, banks took recourse to the repo window at the four-day weekend liquidity adjustment facility auction drawing Rs 11,525 crore. The liquidity demand was also partly influenced by the sell-out by foreign institutional investors ahead of Federal Open market Committee meeting next Wednesday. Traders expect a hike by at least 25 basis points in the Federal funds rate.

Repo rates

Besides global factors, there are also expectations of a hike in the domestic repo rate. The Vijaya Bank's Chairman and Managing Director, Mr Prakash Mallya, said, "Repo rates should go up by at least 25 basis points. There are few alternatives."

Hints of a hike were also evident from the trends at the weekly Treasury bill auction. The cut-off yield on the 91-day Treasury bill was fixed at 7.39 per cent, up sharply from 7.14 per cent. The weighted average yield at the auction was 7.22 per cent. Anticipations of a possible hike were also evident from the low interest in the T-bill auctions. The competitive and the non-competitive bids were just Rs 1,000 crore as against the notified amount of Rs 2,000 crore, inclusive of the market stabilisation scheme. The trend was identical in the case of the 182-day bill also, where the cut-off and weighted average yields were fixed at 7.75 per cent and 7.53 per cent respectively.

As a result, the 10-year yield to maturity (YTM) moved up to 7.85 per cent on a weighted average basis, as against 7.81 per cent the previous week.

The undertone remained weak. Daily trade volume last week was barely Rs 1,200 crore. The volumes were lifted largely on account of insurer intervention. As a result, the yield spreads narrowed to 76 basis points between one year and 29 years. Insurer interventions were mostly at the long end. In fact, at last week's auction of the 7.94 2021 security for raising Rs 5,000 crore, life insurers and provident funds were the largest bidders.

Banks stay away

Banks preferred to stay away anticipating further hardening of yields after next week's credit review by the Reserve Bank of India. In fact, with focus on inflation control, no banker is expecting any change in the Statutory Liquidity Ratio of 25 per cent. Inflation is currently at 5.95 per cent. This translated into a one-year real yield of 1.55 per cent, giving room for some correction.

However, bankers said that with liquidity remaining tight, for the time being, the market stabilisation scheme was likely to be put on hold. Already, the RBI was mopping up far less than the notified amounts.

But bankers said that redemptions of maturing MSS securities were expected to ease the liquidity situation in the markets.This was also on account of the high nominal credit-deposit ratio that continued to remain at 74 per cent. However, deposit mobilisation was beginning to pick up, after the series of deposit rate tweaks. Incremental CD ratio for the latest week was also 74 per cent, decelerating from the 100 per cent clip it had maintained since the beginning of this financial year. But bankers are pushing for more rate tweaks especially for a change in the savings bank deposit rate.

This is expected to be taken up with the RBI and the Finance Ministry next week, as bankers meet to tackle the liquidity situation.

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