The Hindu Business Line : Bonds stay steady despite firm oil prices

Bankers said that oil companies continued to take forward cover. Oil prices are currently at $65 a barrel. This translated into weighted average import price of $60 a barrel. Despite oil companies' rush for cover, steady inflows from external commercial borrowings, foreign direct investments and non-resident Indian inward remittances ensured that forward premia stayed under 5 per cent. In fact, 6-month and 12-month forward premia was below 4 per cent, indicating that there could be further inflows in the coming months.

Tight Liquidity

However, despite these anticipated inflows, liquidity remained tight. Bankers said that this was largely on account of the RBI's restraint in open market interventions. The restraint resulted in the dollar-rupee exchange breaching Rs 41 to a dollar once again last week.

The tightness in the liquidity as a result was evident from banks using the repurchase window of the RBI. At the weekend's two Liquidity Adjustment Facility auctions, banks drew a total of Rs 5,010 crore through the repo window 7.75 per cent. But bankers said what also ensured the tight liquidity was also the aggressive mopping up of liquidity through the Market Stabilisation Scheme (MSS).

T-bills

At last week's Treasury bill auctions, the cut-off yield on the 91-day Treasury bill was fixed at 7.65 per cent unchanged from the previous week. The weighted average yield also remained unchanged at 7.60 per cent. However, the bids for the T-bill auctions continued to be high. The combined bids - competitive (banks and primary dealers) and non-competitive (non-bank participants) - were Rs 6,875 crore. But the retention by the RBI, under the normal and MSS was Rs 3,551 crore, as against a notified amount of Rs 2,000 crore. At the 364-day T-bill auctions, however, non-competitive bidders stayed away. The cut-off yield on the 364-day T-bill was fixed at 7.80 per cent and the weighted average yield was 7.77 per cent.

In addition, the RBI mopped up Rs 8,000 crore through placement of the 7.38 per cent 2015 per cent and the 8.35 per cent 2022. Combined bids (competitive and non-competitive) for the issues were Rs 17,864 and Rs 8,556 crore as against a notified amount of Rs 5,000 crore and Rs 3,000 crore respectively. Life insurers picked the 8.35 per cent security at a yield-to-maturity (YTM) of 8.40 per cent. Primary dealers and non-life insurers picked up the 7.38 per cent at 8.24 per cent YTM.

Time deposits swell

Bankers said swelling deposits in the banking system drove the preference for T-bills by bankers. Deposit growth was particularly at the short-end time deposits from retail savers. In fact, time deposits during the last reporting fortnight grew by over Rs 21,000 crore. Netted for bulk deposits, bankers said they were witnessing a growth in excess of 20 per cent.

Part of the growth was in view of the high rates of interest being offered. Public sector banks were offering rates of 9.5 per cent and even 10 per cent for one-year deposits. Moreover, certificates of deposit are also beginning to re-emerge. Rates offered on CDs were close to 11 per cent for up to a year. As a result, banks preferred to park in short term instruments for their reserve ratio obligations.

Yet despite the preference for T-Bills, the 10-year YTM remained steady. The weighted average 10-year YTM last weekend was at 8.17 per cent unchanged from the previous week.

Trading volumes

The undertone was moderate and daily trade volumes remained above Rs 1,000 crore. But bankers said that some of the banks were also resorting to weekend investments. This essentially implied picking up securities towards the weekend, and then unloading them at the beginning of the week. In such operations the spreads though were thin, traders said.

But traders said that the markets were poised for a rally. Expectations of a rally were largely on account of the changed fundamental factors. With inflation down to 5.27 per cent, the one-year real yield is currently at 2.55 per cent, more than 100 basis points above internationally accepted levels. Consequently, bankers said that this trend alone could drive down yields in the coming weeks.

Yield spreads

Moreover, yield spreads were now beginning to widen. The spreads are now 75 basis points, up from 50-60 basis points difference witnessed during the last few weeks. This was largely on account of the absence of insurance companies and banks' move to offload their long-dated securities, which prompted high yields at the long end. The 29-year security is currently quoted at 8.6 per cent YTM.

Besides, given the slack season, credit offtake had considerably slowed down. Bankers said that credit growth was now about 22 per cent. This trend was partly driven by bankers, beginning to tighten retail and real estate loans, as part of their portfolio rebalancing exercise. As a result, incremental credit-deposit ratios were down to 38 per cent. On the other hand, incremental investment deposit ratios have advanced to 75 per cent. This implied that despite the drop in asset yields and net interest margins, trading operations would now sustain the profitability of banks this season. Dealing rooms are now swinging bank into action.

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