The Hindu Business Line : Bonds pause on FIIs’ exit

Traders said the weak oil prices failed to improve flagging trade sentiments. On the contrary, a trader said, “Falling oil prices meant less flows from West Asian investors into the domestic equity markets.”

Markets across the world were affected by the financial mayhem on Wall Street. The event was triggered by the collapse of Lehman Brothers and the take over of Merrill Lynch. This was followed by the bail-out of American International Group by the US Fed.

These institutions have a substantial presence in India. Traders said the institutions are therefore likely to extend unwinding of Indian investments both in equities and debt. The unwinding, traders said, is part of the deleveraging exercise to cut their liabilities. Foreign institutional investors also hit stop-loss triggers. FII equity pullout since the beginning of this month was $1.9 billion (Rs 8,700 crore). FII investment in debt securities was just $499.3 million (Rs 2,700 crore) during the same period, implying a net outflow of $1.4 billion (Rs 6,000 crore).

The rupee, as a result, plunged to Rs 46.32 a dollar . Despite the exchange rate volatility, the Reserve Bank of India’s intervention in the exchange markets was restricted, traders said.

With the rupee’s depreciation, exporters took forward cover. As a result, forward premia slumped. Premia, for one, three, six and 12 months ended the week at 0.78 per cent (4.19 per cent), 0.69 per cent (3.32 per cent), 0.6 per cent (2.53 per cent) and 0.63 per cent (2.53 per cent) respectively. Even the weekend overnight forward premia crashed despite call rates at 15 per cent. Normally, high call rates tend to raise forward premia. But this time around, despite the high call rates, foreign banks largely remained neutral. This was in view of the large demand for spot dollar. Foreign banks were in fact, largely buyers for cash and selling spot dollar on behalf of foreign institutional investors. This pulled down the cash spot premia to 0.52 per cent.

The FII pullout prompted domestic investors also to cut losses. Investors preferred cash to stocks, resulting in a tight liquidity situation. Domestic mutual funds were faced with severe redemption pressures. The immediate tight liquidity was evident from the recourse to the RBI’ repo window. Recourse to the repo window amounted to Rs 83,510 crore, making it the highest weekend repo intervention. Besides, many banks/corporates were also caught with advance tax payment liabilities.

Fears that the tight liquidity could extend further resulted in banks rushing to the certificates of deposit market. During the week, at least Rs 3,500 crore was picked up by banks through CDs, at rates as high as 11.85 per cent. Corporate depositors that unwound mutual fund investments shifted to CDs. In addition, banks were also faced with large deposit accretions. As a result, since the beginning of this financial year, time deposits with the banking system increased by Rs 2.5 lakh crore.

The turmoil in the equity and exchange markets, however, had little impact on the weekly Treasury Bill auctions. At the 91 day T-Bill auction, the cut-off yield was 8.65 per cent, down 8 basis points over the previous week. The weighted yield also dropped 8.60 per cent.

But the ten year yield to maturity (YTM) dropped slightly last week on a weighted average basis to 8.41 per cent, from 8.36 per cent the previous week. Traders said that the stability in yields was driven partly by demand for government securities for meeting statutory liquidity ratio (SLR). Deposit accretions pulled down the incremental CD ratio 21 per cent, implying a shortfall in Government securities.

Trade volumes

Daily average trade volumes thinned down during the week to Rs 5,700 crore. The thin volumes were largely in view of the tight liquidity and limited sellers for Government securities, traders said. In fact, there were more buyers for Government securities in view of the SLR demand.

However, the outlook remained uncertain. The uncertainty was evident from the inverted yield curve. One-year yield at 8.88 per cent was more than the 27-year yield at 8.71 per cent. The inversion, bankers said, was also largely due to the presence of the Life Insurance Corporation. LIC was a buyer for long dated paper and seller for short dated securities. The RBI was also a buyer of Government securities. According to data from the RBI’s weekly statistical supplement, G-Sec purchase was Rs 515 crore for the week ended September 12.

Inflation worries

Besides, inflation worries continued to haunt traders as it moved up once more, despite the sagging oil prices. India’s oil import basket was down to $91.42 a barrel during the week or the lowest level since the beginning of this financial year. But inflation as measured by the WPI was 12.14 per cent.

Yet, traders said fear of RBI intervention in the money markets appeared to have subsided. This was despite the inase in credit off-take. Credit-deposit ratio is currently 72 per cent as credit off-take grew by Rs 96,420 crore this financial year. Besides, money supply growth continued to remain above the RBI’s target of 21 per cent, well above the targeted band of 15-17 per cent. Yet, few expect major policy rate interventions immediately in view of the global turmoil.

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