The Hindu Business Line : Revised CRR, corporate redemptions put pressure on money markets

Bangalore May 6 Bonds sank during the week, as banks scrambled for meeting the revised cash reserve ratio requirements and pressure mounted from corporates for prepayments of external commercial borrowings.

Bankers said that with oil prices beginning to soften during the week in tandem with fading tensions in West Asia, oil companies also moved to hedge their import payments taking advantage of the firm rupee-dollar exchange rates. International oil prices are currently about $62 a barrel, implying a basket price of just slightly over $55 a barrel.

Bankers said that several corporates had also begun drawing on their cash balances to take advantage of the Reserve Bank of India's free allowance for making debt prepayments. Under the current guidelines, corporates are allowed prepayments up to $400 million through the automatic route. As a result, forward premia remained firm at above 5 per cent up to 12 months. The corporate interventions in the foreign exchange market also took the heat of the RBI and reduced the need for sterilisation operations. This resulted in pushing down the rupee-dollar exchange rate closer to 40.94 off the intra-week high of Rs 40.61.

The combined effects of the revised CRR of 6.5 per cent and the corporate redemptions put pressure on the money markets leading to a tight liquidity situation. The tightness was evident from weekend liquidity adjustment facility auctions. As a result, there was more recourse to the repo window of the RBI, for liquidity support of about Rs 820 crore.

The tightness was also evident from the firm cut-off yields at the weekly Treasury bill auctions. The cut-off yield at last week's 91-day T-bill was fixed at 7.69 per cent, up 34 basis points from the previous week's 7.35 per cent. The weighted yields also firmed 13 basis points to 7.44 per cent. The wide spread between the weighted and the cut-off yields indicated that some of the bids were lower than the cut-off yields, particularly bids made by the primary dealers.

T-bill window

The hardening yields notwithstanding, the T-bill window continued to evince good response from banks. The Canara Bank Chairman and Managing Director, Mr M.B.N. Rao, said, "Short-term yields are attractive for us and liquidity is of extreme importance now." The preference was evident from the turnout at the T-bill auctions. Competitive bids at the 91-day T-bill auctions were Rs 2,500 crore as against the notified amount of Rs 2,000 crore. Similarly, the 182 T-bill yields also remained firm at 7.73 per cent.

The tight liquidity also reflected in the 10-year yield to maturity last week, that ended at 8.21 per cent on a weighted average basis, up from the previous week's 8.14 per cent.

Low trade volumes

The undertone was weak, apparent from the low trade volumes. Daily trade volumes were just about Rs 500 crore. However, bulk of the trade volumes were long dated securities, mostly due to the switches by insurance companies, both life and non-life entities. Life insurance companies faced with a large premium accretion were picking up securities at the long end almost entirely through switches. But given banks intent to exit from dated securities to derisk investment portfolios ahead of Basel II migration, it was advantage insurers. The favoured securities included the 8.33 per cent 2036, traders said.

This resulted in flattening yields. The inter yield spreads between one year and 29 years were barely 60 basis points, implying that the outlook was weak for bonds. This was despite the retreat in inflation to 5.77 per cent. This pushed the one-year real yield to 2 per cent. The real yield was at least 50 basis points over globally acceptable levels, clearly giving scope for a rally. However, the bankers said that unless inflation deceleration was sustained, yields would continue to remain firm.

Besides, bankers said, that primary factor driving was credit demand. Credit demand for the first time in about two years, has actually shown a negative growth on a year-on-year basis. Yet, despite the perceptible drop in credit demand, driven by a fall in retail loan off-take, the credit-deposit ratio remained close to 75 per cent for most of the banks. The reason was that redemption of bulk deposits had begun. Clearly there was little scope for any increase in investment-deposit ratio. This ratio is currently 32 per cent for most of the banks. The reality was that few banks were interested in investing in long-term securities. "Derisk" is the buzzword in both public and private sector banks.

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