The Hindu Business Line : Bonds soften on foreign investment flows

Traders said that the slight softening was partly on account of the inflows that were approximately about $20 billion. Part of the inflows was for PGCIL’s initial public offering subscription. The inflows were largely from qualified institutional investors and non-resident Indians looking for better returns on their investments.

Exchange rate

The inflows pushed up the dollar-rupee exchange rate to a nine-year record of Rs 40.44. But a reversal was expected, traders said. Anticipation of the reversal was evident from the widening forward premia at the short end. One- month forward premia moved to 1.75 per cent as the Reserve Bank of India intervened. Premia for six months was 1.65 per cent and 12 months at 1.75 per cent.

The firm premia was also driven by oil companies’ rush for forward cover as oil prices punched past $80 a barrel. As a result, the effective weighted average cost of petroleum imports are now well over $75 a barrel. This demand from the oil companies took the load off the RBI. At the liquidity adjustment facility auction, recourse to the reverse repurchase window was only Rs 15,710 crore from 14 banks, mostly public sector banks.

At the weekly Treasury Bill auctions, bids remained high. Competitive and non-competitive bids for the 91 day T-Bills were Rs 13,170.92 crore as against the notified amount of Rs 3,500 crore. The bids accepted amounted to Rs 7,800 crore.

The cut-off yield though was 7.10 per cent, up from the previous week’s 7.06 per cent. The weighted average yield also moved to 7.06 per cent from 7.02 per cent. The cut-off yield at the 364 day T-bill was 7.47 per cent and bids made amounted to over Rs 11,000 crore, though there were no non-competitive bids.

With this kind of liquidity, the ten-year yield to maturity (YTM) softened slightly towards the weekend to 7.92 per cent on a weighted average basis as against the previous week’s 7.96 per cent.

The undertone was weak. Daily trade volume during the week was down to Rs 4,900 crore. The drop was largely on account of the absence of insurance companies, as they waited for the second half of the month.

The bid offer spreads also widened, evident of the low interest in trading. The yield spread between one year and 29 years was close to 100 basis points.

Traders said the major factors that had driven yields down were the accretion in deposits and sharp slowdown in credit off-take. Credit off-take since the beginning of this year was about Rs 32,000 crore as against Rs 90,000 crore during the corresponding period of the last financial year. Credit growth was down to about 20 per cent on a year-on-year basis as against 32 per cent the previous year.

But one-year real yields remained wide at close to 4 per cent, with inflation down to 3.52 per cent as measured by the wholesale price index. Even assuming a 40 basis points difference between the provisional and final numbers, real yields were still wide.

However, this was likely to change, as domestic oil prices rise in tandem with international prices. Oil companies were already pushing for increases as refinery margins come under increasing pressure. Bankers said that once this exercise was completed, real yields would come down to the level of 1.5 per cent, which are the internationally accepted levels.

Nominal yields

But bankers said, that nominal yields are likely to remain ranged. This was despite liquidity pressure of advance tax payments, when at least Rs 50,000 crore would be removed from the system. Deposits, especially retail deposits, were growing by at least 26 per cent. In addition, foreign deposits from NRIs were also growing. Credit off-take was expected to pick up soon. With credit demand expected to remain high, most banks preferred to stay invested in short tenure securities.

Already, the incremental credit-deposit ratio was currently at 78 per cent, largely driven by drawdowns of deposits by corporates. Incremental investment-deposit ratios were also down to about 12 per cent, largely on account of redemption of bulk deposits. Yields are unlikely to show any major softening as a result.

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