The Hindu Business Line : Bonds halt slide on technical correction

Deposits accumulated during the last fortnight were invested largely in Treasury Bills and government securities. Many delayed maintaining their CRR. This was, largely because CRR is a zero return balance.

Consequently, towards the end of the reporting fortnight, banks scrambled for liquidity, resulting in a temporary tightening. The tightening pushed up call rates to 8 per cent.

With borrowings reaching the upper limit (the RBI’s prescribed limit for inter bank lending is 25 per cent of net owned funds and borrowing is 100 per cent of NOF), several banks took to the collateralised borrowing and lending obligations (CBLO) market.

CBLO volumes, as a result, were close to Rs 31,000 crore and rates shot up to 8 per cent.

This drove many banks to the RBI’s liquidity support window at 7.75 per cent. At the weekend liquidity adjustment facility auction, banks borrowed Rs 33,075 crore through the repurchase the window. Besides, last week the foreign institutional investors (FII) sold $1.27 billion worth of securities, according to data released by the Securities Exchange Board of India. Some of the FIIs and foreign banks had anticipated some reduction in the reverse repurchase rates, at the RBI’s third quarter review, though this failed to materialise.

Fed rate cut

The exit was prompted by improved valuations in their home turf after the sharp 50 basis points reduction in the key Federal Funds rate. Fed Funds is the overnight borrowing/lending of overnight reserve funds, by US banking institutions.

Fed Funds rate is now 3 per cent. The reduction in the rate triggered an inward capital, particularly NRI deposits, to capitalise on interest differentials. The flows resulted in the rupee appreciating against the dollar to Rs 39.36 provoking RBI interventions. This was despite the presence of public sector oil companies for meeting their payment obligations.

Forward premia up

The flows pushed forward premia up sharply. Premia for one, three, and months were 1.52 (0.3) per cent, 2.34 (0.91) per cent and 2.08 (1.73) per cent respectively. Some banks reacted towards the weekend, cutting their NRI deposit rates by over 100 basis points across all maturities, to check the inflows.

However, the inflows had little effect on the Treasury Bill auctions.

At the 91-day auctions, yields firmed to 7.27 per cent last week, up from 7.19 per cent. The weighted yield was 7.23 per cent.

But competitive bids were also lower than the notified amount of Rs 2,000 crore. Competitive bids were just Rs 1,616 crore and non-competitive bids were Rs 884 crore. The amount retained was Rs 1,383 crore.

But traders said that this was largely on account of the preference for longer maturities traders said.

This was evident from the trend at the 364-day T-bill auction, where the bids were Rs 3,185 crore against the notified amount of Rs 2,000 crore. The cut-off yield and the weighted yields were 7.49 per cent and 7.44 per cent respectively.

The hardening of yields also stemmed from the RBI’s aggressive liquidity mop-up operations through the market stabilisation schemes, through reissue of the 11.30 per cent 2010 security. The security was placed at a cut-off yield to maturity of 7.57 per cent.

Besides, the RBI announced the placement of another Rs 9,000 crore through reissue of 8.20 per cent 2022 and the 8.33 per cent 2036 securities.

This was in addition to the Rs 2,500 crore of MSS T-bills. Traders said that the continued MSS interventions were in line with the RBI formally declaring at the third quarter monetary policy review, that inflation was its anchor.

Ten-year yield-to-maturity as a culmination of these events/statements sank to 7.52 per cent on a weighted average basis, down from the previous week’s 7.42 per cent.

Trade volumes

However, trade volumes improved. The average daily trade volume was Rs 8,000 crore. The jump in trade volume was partly due to recourse to CBLO by banks.

The outlook though was positive. This was evident from the reversal in derisking by several public sector banks.

Many banks that had pulled down the residual tenure to under 2 years pushed it up to 3 years and above. Said Syndicate Bank’s General Manager (Treasury and Investments) Mr D.C. Pai: “Yields are likely to remain stable. Therefore, some of us have taken advantage to improve portfolio yields.”

High I-D ratios

In fact, most of them expect stability at current levels. This was evident from the high investment-deposit ratios. I-D ratios this year so far is 40 per cent. Banking sector’s investments this year so far are Rs 1.68 lakh crore or about 400 per cent more than the corresponding period of last year.

But credit is beginning to expand. C-D ratios improved to 56 per cent this year, reversing a trend of the last few weeks, when it remained below 50 per cent. Bankers said that the pick up was mostly from farm and industrial sectors.

Many industries that had planned external commercial borrowings during the last few months reverted to domestic credit markets in view of the widening spreads and the RBI’s clampdown to contain money supply.

Despite the containment efforts, money supply growth accelerated to 24 per cent on a year-on-year basis, on the back of a 44 per cent growth in net foreign exchange assets. Besides, inflation accelerated to 3.93 per cent and brought the one-year real yield down to 3.5 per cent. One-year real yield though remained well above the internationally accepted level of 1.5 per cent.

However, no reversal in rates are likely, traders said. Instead, the current pace of credit growth is expected to be maintained. But traders said that the RBI’s mid-term intervention for liquidity containment is expected in the form of further hikes in the CRR, in view of the arbitrage flows. The flip side is that further CRR hikes is likely to hit both the net interest margins and the return on assets a pointer to further tweaks in deposit rates.

More Stories on : Financial Markets | Debt Market | Govt Bonds

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Widespread snow, rain as cold wave lifts

ITC-Welcom hotels plans foray into medical tourism

Panel to discuss removal of tax sops for SEZs

ONGC’s marginal fields: $35 cap on crude pricing may go

Container Corporation (Rs 1,795.6): Buy

Day Trading Guide

Indians among world’s heaviest receivers of ‘scraps’

Bonds halt slide on technical correction

Liquidity crunch likely to ease

Private banks keep up the good show in Q3

BrahMos-2 will see design, development of hypersonic missiles: CEO