The Hindu Business Line : MFs, insurers fancy 91-day T-bills

Bangalore April 1 Bonds ended weak last week, as nervous traders were shaken up by the Reserve Bank of India's (RBI) week-end intervention. Traders said the intervention caught them off guard. However, a few said that some proactive steps were anticipated in view of the surge in inflation, but not such drastic measures.

The measures were expected especially since money supply growth was close to 22 per cent, as opposed to the nominal GDP growth of about 14 per cent. Most of the additional liquidity came from foreign exchange reserves accretion that has grown by over 32 per cent on a year-on-year basis.

Reserve Accretion

Foreign exchange reserves are close to a record $200 billion, despite the RBI's best efforts to prevent it from getting there. This accretion has prevented inflation from going below the 6 per cent level while the targeted rate is 5 per cent for the current year.

The cash reserve ratio has been raised to 6.5 per cent and the repo rate to 7.75 per cent. But the reverse repurchase rate, the rate at which liquidity is removed from the banking system through overnight placement of securities was kept unchanged at 6 per cent, leaving a wide band of 175 basis points.

Despite reserve accretion the liquidity scramble continued, with call rates shooting to over 50 per cent during the week. Most of the rupee demand came from the foreign and domestic private sector banks as they rushed to window dress their books ahead of the year-end closing. Some public sector banks, however, made large profits in this rush for liquidity, as the foreign banks swapped foreign currency for rupee funds for meeting their advance tax deadlines.

Rush to hedge

The swaps pushed up forward premia for one month to 7.5 per cent. But traders said oil companies were also rushing to hedge their dollar exposures in view of the soaring oil prices. For accessing the foreign exchange, the oil companies have begun drawing on their credit lines. As a result, banks' recourse to the repurchase window of the RBI remained high at Rs 30,650 crore.

T-bill auctions

The tightness in the call, however, did not reflect in the Treasury bill auctions. At the 91-day T-bill auctions during the week, the cut-off yield was fixed at 7.98 per cent unchanged from the previous week. The weighted average yield was level at 7.98 per cent.

However, the amount bid for the auctions remained high. Competitive bids were Rs 4,705 crore, of which only the notified amount of Rs 2,000 crore was lifted. But the non-competitive bidders pitched with Rs 6,000 crore, and the entire amount was mopped up by the Reserve Bank.

Liquidity to ease

Bankers said that a majority of the non-competitive bidders were money market funds and insurance funds, who are now beginning to take a fancy for the 91 day T-bill. This is a record mop-up, since the beginning of the market stabilisation scheme, indicating that the current regime of liquidity tightness was unlikely to last longer.

This was also evident from the competitive bidders beginning to move into long-term securities. At the 364 day T-bill auction, the amount bid was Rs 10,475 crore at a cut-off yield of 7.98 per cent. The 10-year YTM ended last week at 7.95 per cent, almost unchanged from the previous week's 7.94 per cent. This was largely because bankers now expect the advance tax to flow back into the banking system reversing the tight liquidity situation.

Yet, the undertone remains damp. Daily trade volumes remained at around Rs 500 crore. Besides, the spread between 1 and 30 years has narrowed. It is now slightly above 40 basis points.

Banks were also sellers, in view of the high credit offtake from the farm sector. But a banker said, "It is not so much the high credit off take, but bank penetration into the rural regions has improved."

But the low reverse repo rates were driving bankers increasingly into the T-bills and long-term securities.

Demand Deposits

The CRR hike is expected to remove close to about Rs 16,000 crore from the banking system, resulting in raising rates to some sectors including retail and home loans. Such a move was also to ensure that credit to productive sectors remained unaffected, bankers said.

Incremental credit-deposit ratios are back to over 100 per cent with redemption in demand deposits. Besides, the lean season for credit offtake was also fast approaching, bankers said. Accordingly, bankers said investment deposit ratios were likely to rise in the coming weeks and yields are unlikely to soften from current levels.

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