The Hindu Business Line : Inflation fears dog market even as insurers return

Bangalore April 22 Bonds remained steady ahead of the Reserve Bank of India's lean season Credit Policy announcement and build-up of liquidity in the financial markets.

Traders said that the steady trend was also largely on account of the Finance Minister's talk down to bankers on April 19. The talk down suggested sternly that bankers ease off credit growth. Bankers said this suggestion by the Minister indicated that more bank funds would find their way to investments.

However, what contributed to the steady rates was the drawdown by oil companies of their credit lines for hedging their imports.

Appreciating rupee

Besides, with the rupee appreciating by about four per cent over the corresponding period of the last year, more importers, external commercial borrowers and banks have opted to take forward cover at the current levels. As a result, forward premia remained high.

One month forward premia was 9 per cent, three months at 8 per cent, and 12 months at 5 per cent. The bankers said that, the high forward premia was also indicative of anticipation that the current high rupee-dollar exchange rates were unlikely to be sustained.

The expectation notwithstanding, the RBI intervened in the markets to temper the rise in the rupee exchange rates. At the week-end liquidity adjustment facility auctions, the entire bid amounts of Rs 16,200 crore was mopped up.

High bids

During the week, the RBI mopped up another Rs 7,000 crore through the weekly T-bill and market stabilisation scheme auctions. At the weekly 91-day auctions, the cut-off yield was fixed at 7.48 per cent, up 13 basis points over the previous week. Similarly, the weighted average yield also moved up 16 basis points to 7.43 per cent, over the previous week.

Despite the firm yields, the bids remained high at Rs 27,14.35 crore. The retention of competitive bids was contained at Rs 709.14 crore. Similarly the non-competitive bids accepted were Rs 1,000 crore. At the 182-day T-bill auctions, the cut-off yields fixed were 7.75 per cent and the weighted yields at 7.53 per cent.

The competitive bids accepted were Rs 1,500 crore as against the bid amount of Rs 3,085 crore. The non-competitive bids accepted were Rs 524.16 crore. Similarly, at the market stabilisation scheme auctions of the 7.55 per cent 2010 security, the retentions were Rs 2,997.4 crore as against the competitive amount Rs 13,225 crore.

New trend

But a distinct trend appeared to be emerging. During last week, the retentions in the reverse repos were low, whereas the retentions from competitive bidders in the MSS auctions were high, a departure from the past. This trend appeared to convey the signal that there could be one more round of liquidity tightening in the coming weeks.

This anticipation prevented a sharp drop in the 10-year weighted average yield to maturity (YTM), which ended last week at 8.08 per cent, though it was down six basis points over the previous week's 8.14 per cent.

But traders said what also helped to soften yields slightly during the week was the presence of life insurance companies. They said that life insurers reshuffled their portfolios, through switches.

Softening yields

The switches resulted in pushing up yields at the short end and softening at the long end. For instance, insurers were selling the 11.83 per cent 2014 security at yields as high as 8.20 per cent. The reason for the high yields at the short end were also largely because of a shortage of long dated papers.

Currently, there are no 30-year papers available and only 29-year securities are available. The effect of insurer switches resulted in some of the banks booking treasury profits. Among the securities sought by the insurers included the 8.33 per cent 2036, whose YTM softened from 8.54 per cent to 8.48 per cent last week. This paper was also sought in view of the high current yields.

Yet despite the enlarged presence of players, bonds were overshadowed by inflation fears. With the one-year real yield at 1.85 per cent, the scope for yields to soften was limited, bankers said, unless inflation reversed.

Inflation fears

This fear was evident from the daily low trade volumes of barely Rs 600 crore. Moreover yields spread narrowed once more, in view of the large numbers of short-dated securities sellers. The yield spreads narrowed to 54 basis points last week.

But this may yet reverse as the FMs message gets through to banks. Most of the incremental investments with the banks are currently short-dated securities as part of the derisking strategies adopted by them. Incremental investment deposits ratios of the banks are just 6 per cent. Of this incremental government security investments were just about 5.5 per cent.

This could yet change and banks are expected to return to investments soon enough, traders said.

Term deposits were likely to pick up in the coming weeks, as bankers prepare to tweak rates once more for mobilising resources, clearing signalling a paradigm reversal — from just pushing credit, as during the last few years.