The Hindu Business Line : ‘Low cut-off yield signals softening of interest rates’

Bangalore, July 13 With financial markets awash with liquidity, bankers are speculating of a possible mid-term intervention by the Reserve Bank of India to correct the situation.

They said that any term intervention was likely to signal softening of rates in the coming weeks.

Said Mr K.N. Vaidyanathan, Chief Executive Officer of Alchemy Capital Management, “We can look forward to a softening of interest rate regime.”

Signs of softening became evident from the low cut-off yields at Wednesday’s 91-day Treasury Bill auction.

The cut-off yield was fixed at 5.12 per cent, the lowest level since April 2005.

The weighted yields dropped to 5.03, also the lowest since April 2005. Last week, the cut-off yield on the 91-day T-bill was 6.39 per cent.

PSBs remain cautious

Public sector bankers, however, preferred to remain cautious. Canara Bank’s Economist Mr Manoranjan Sharma said: “The fall in yields is definitely influenced by the current liquidity situation. But it is too early to draw inferences of softening rates.”

The high liquidity situation has resulted in rates in both call money and the collateralised borrowing and lending obligation markets to drop below one per cent. In fact, the current prevailing rates are about 0.5 per cent.

Traders said that one of the major factors contributing to the liquidity overhang was the cap on the reverse repurchases by the RBI.

The reverse repo window is used for siphoning out liquidity. However, since the beginning of this year, the reverse repo window has been capped at Rs 3,000 crore. The combined bids at the two daily Liquidity Adjustment Facility auctions for the reserve repo during the last few days were in excess of Rs 75,000 crore.

Rush for T-Bills

A trader said: “With only Rs 3,000 crore or Rs 2,999 crore mopped up through the reverse repo window, there is a rush for T-Bills for parking funds. I cannot tell whether they (RBI) might actually cut policy rates. But we are expecting some intervention.”

In fact what was also contributing to surfeit of liquidity was the slowdown in credit offtake.

Credit offtake with most banks is now down to 20-22 per cent after the RBI clamped down on retail and home loans.

But deposit growth has accelerated as more banks jostle with each other offering rates of over 9 per cent for tenures of up to a year and 10 per cent for maturities above one year.

This has now resulted in a situation where bankers are pushing funds into T-bills, under the market stabilisation scheme.

Removal of ceiling

The bankers said that faced with liquidity overhang, many of them were pushing for removal of the reverse repo cap. Banks heads intend taking this subject up at the meeting with the RBI during the month-end. Yet this is a proposal backed mostly by foreign and private sector banks.

Some bankers said that the RBI was unlikely to relent on this issue. This is because the cap was introduced to curtail arbitrage opportunities at six per cent.

But they said that the cap was likely to be removed, though the reverse repo rates may also be pushed down further to neutralise the arbitrage opportunities.

As a result, some PSU bankers have sought raising MSS amount through the 91-day T-bill route for siphoning out the excess liquidity. In fact even in the 91-day, T-bill auctions, the rejection of competitive bids were high.

At Wednesday’s auction, the competitive bids stood at Rs 7,253 crore, though the bids accepted were only Rs 2,000 crore.

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