The Hindu Business Line : Bonds go into a tailspin as traders press panic button

Bonds went into a tailspin, as the Reserve Bank of India (RBI) remained combative battling inflation, prompting nervous traders to reach for stop-loss triggers.

Traders said that the international situation was also not very conducive as tensions in the Persian Gulf remained in a heightened state. As a result, many of the foreign institutional investors were sellers in the equity markets. Besides, the situation also prompted oil prices to reach the highest level since September last year. Oil prices closed at $66 a barrel and there are fears that it could close at $70, if the current standoff continued.

But foreign exchange inflows remained high on the back of high export and capital account inflows, especially external commercial borrowings. In addition, bankers said, remittances from non-residents also remained high. In fact, many of the NRI accounts were being converted into non-repatriable rupee accounts, as they began taking advantage of the high interest rupee deposits. In fact, the surge in deposits was substantially driven by the NRI account conversions.

Given this kind of inflows taking place, traders said that the RBI has preferred to stay away from the markets and allow the rupee to appreciate against the dollar. Despite the non-intervention, the exchange reserves were within striking distance of $200 billion. The non-intervention, however, was leading to a shortage of rupees and tight call markets, with rates remaining in double digits.

As a result, at the weekend liquidity adjustment facility auction, traders continued their recourse to the repo window of the RBI, even after the hike in rates to 7.75 per cent. Banks borrowed close to Rs 1,500 crore at the four-day weekend repurchase.

But the interest situation was prompting exporters to begin repatriation of their earnings back into the country in a bid to cut losses due to exchange rate appreciation. Some have quietly begun taking hedging against exchange rate appreciation, though this was yet to reflect in the forward premia. Forward premia remained high across all maturities at five per cent between 6 and 12 months. For tenures between one and three months, forward premia were closer to 7 per cent.

T-bill auctions

The surge in deposits as a result of the NRI and export inflows was evident from the high response at the weekly Treasury bill auctions. At the 91-day T-bill auctions, the cut- off yields were 7.94 per cent, off 4 basis points from the previous week. But the weighted yields on the 91-day T-bill were down 10 basis points, indicating that the tight liquidity was coming to an end. The bids at the T-bill auctions also manifested this trend. As against the notified amount of Rs 2,000 crore, the competitive bids made were Rs 8,612 crore, though only Rs 2,000 crore was accepted. The entire lot of Rs 1,200 crore of non-competitive bids were lifted.

The 182-day T-bill auction also showed a similar trend with a cut-off yield of 7.97 per cent and bids of Rs 7,005 crore, though only Rs 1,500 crore was accepted.

But the 10-year yield to maturity (YTM) reflected a divergent trend. The 10-year YTM on a weighted average basis hardened to 8.16 per cent on a weighted average basis, as against the previous week's figure of 7.95 per cent. This hardening, bankers said, was largely on account of the large number of sellers for long-term securities and the absence of bulk buyers such as the Life Insurance Corporation of India.

Hopes of rally

Despite the absence of the LIC, the undertone was firm. This was apparent from the trade volumes in the market. Daily trade volumes topped Rs 1,500 crore for the first time this calendar year. Similarly, the yield spreads widened to 70 basis points, indicating that a rally may be imminent.

The expectation of the rally was also on account of the retreat in inflation. Inflation was 6.39 per cent as measured by the wholesale price index. The one-year real yield was up to 1.6 per cent last week as against the previous week's figure of less 1.4 per cent.

What could also lead to a rally was the lean seasons credit policy, the bankers said. The lean season is when credit off-take from the farm/industrial sector tapers off, leading bankers to chase investments. However, during the last two years, retail credit off-take had ensured the demand at 30 per cent. Since December last year though, bankers have tightened up on retail credit disbursements.

Besides, bankers said demand for investments would also be driven by accretion in deposits. Deposits in the banking system were growing at an average clip of 25 per cent. This resulted in pushing down the nominal credit deposit ratios down to 71 per cent, unlike the previous weeks.

However, bankers said, the ratios could still undergo a change when redemption of some of the bulk deposits begin. Already some of the corporates had begun drawing down on the balances, as is evident from the draw down in the demand deposits by over Rs 20,000 crore during the last reporting week.