The Hindu Business Line : Bonds stable; trade volumes remain low

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Bangalore March 4 Bonds remained stable in thin and listless trading during the week despite reduced government borrowings estimated for the next financial year.

Traders said the major worry was not related to fiscal measures but inflation control measures for mopping up liquidity.

The gross borrowing of the Government for the next financial year is estimated at Rs 1,55,455 crore as against the revised estimates for the last financial year of Rs 1,46,532 crore. Market loans estimated for the next financial year is Rs 1,09,579 crore, up from the previous year's revised estimates of Rs 1,07,453 crore and the budget estimates 1,13,778 crore. It is the increase in the MSS ceiling to Rs 80,000 crore, traders said, that would prevent any major retreat in yields.

The lower borrowing estimates for the current year were largely on account of the high tax buoyancy. The tax to GDP ratio is estimated at 11 per cent. Besides, for the next financial year expectations are that this trend would continue. But GDP growth alone is not likely to sustain the Government's revenue and fiscal estimates, in the absence of any extraordinary events.

A back of the envelope calculations indicated that the GDP growth for the next financial year is likely to be in the region of 13.15 per cent. In dollar terms, India's GDP would be in excess of $1 trillion . For the current financial year alone, the revised estimates indicate that India's GDP at current exchange rates is close to $920 billion.

High liquidity

Consequently, bond traders appeared relaxed, taking little notice of the collapse in the equity markets.

At the weekly liquidity adjustment facility (LAF), the RBI mopped up Rs 22,420 crore. The increased liquidity was largely on account of accretion to the foreign exchange reserves. Some of the flows were long-term external commercial borrowings by corporates, though the bulk of it was non-debt capital and current account flows.

The high liquidity was also evident at the weekly Treasury bill auctions. The cut-off yield for the 91-Day Treasury bill slumped to 7.48 per cent and the weighted average at 7.39 per cent, last week. In the previous week, the cut-off and weighted yields were 7.77 per cent and 7.67 per cent respectively. As against the notified amount of Rs 2,000 crore, the competitive and non-competitive bids made were Rs 10,377 crore, though the retention was Rs 6,250 crore. Of this, only Rs 500 crore comprised the liability of the government. The remaining amount was entirely on the market stabilisation scheme account of the RBI. The 364-day T-bill auctions also revealed a similar trend, where the cut-off and weighted yields were 7.73 and 7.66 per cent respectively.

However, the liquidity overhang had no significant impact on the 10-year Yield to Maturity (YTM). The 10-year YTM on a weighted average basis was 7.94 per cent last week, as against 7.95 per cent the previous week.

Trade interest low

The poor interest from traders was evident from the low daily trade volumes. Trade volumes during the week were under Rs 500 crore. There were also little purchases by insurance companies this time, as they preferred to wait for the Budget. But inter yield spreads thinned, largely due to purchases by provident funds. In a thin market even small volumes tend to have an impact on spreads. The spread between one and 29 years was just 60 basis points. Traders said that buyers were mostly mutual funds. This was under the money market schemes. But these schemes were mostly focused on the short end of the yield spectrum of securities.

However, bankers said that the next few weeks could see a flurry of activity in the bond markets. This was because some of the banks have managed to aggressively raise deposits. Consequently, they would have a requirement of government securities for meeting statutory liquidity ratios. This was especially in the case of private sector banks. For the public sector banks, the conversions of securities last month has resulted in raising their investment deposit ratios to about 35 per cent and SLR securities holding to about 33 per cent. Yet PSU bankers see little need to shed the securities. This was in view of the acceleration in deposits. Deposit growth has accelerated to 25 per cent. The gap between credit growth and deposit growth has narrowed as a result of the deposit mobilisation efforts.

Moreover, the real yields also have increased. The one-year real yield was 1.7 per cent. This now gives some leeway for nominal yields to retreat in the coming weeks. That retreat, traders said, would hinge on the entry of insurance companies for making large-scale purchases. But most insurers were focussed on primary issues during the months, as the last phase of government borrowing was expected during the period, by way of dated securities.

Credit growth

What could also upset the banks investments was the credit growth. The incremental credit deposit ratio continued to be close to 100 per cent. Says the Syndicate Bank Chairman and Managing Director, Mr C.P. Swarnkar, "The budget moves will mostly translate into higher farm credit offtake."

Already banks are beginning to rebalance implying that credit to some sectors was redirected to priority areas.

As a result, investment deposit ratios at 35 per cent are unlikely to rise and interest rates unlikely to show major retreats given the fillip for farm and infrastructure needs.