The Hindu Business Line : Liquidity influx sends bond market into a tizzy

Bangalore, Oct. 19 Bonds went into a tizzy with the Reserve Bank of India (RBI) releasing cash reserves and pumping in liquidity to prop up anxious markets.

Traders said that sagging oil prices had little impact. This was because oil price falls were partly neutralised by a 22- per cent depreciation in the rupee against the dollar since the beginning of this financial year. As a result, little benefit accrued to the oil companies, despite the fall in the import basket price to just $62.86 per barrel.

The steep depreciation stemmed from the continued unwinding of investments by foreign institutional investors and hedge funds. FIIs, last week, made net sales equivalent to $1.8 billion. The sales kept the rupee-dollar exchange rate at Rs 48.68. The drop would have been far sharper but for the dollar sell-off by the RBI during the week, traders said.

The intervention was done partly through swaps, sell and buyback at a later date. The swaps and hedging by oil companies pushed up forward premia. Premia for one, three, six and 12 months firmed slightly to 1.48 per cent (0.74 per cent), 0.66 per cent (0.16 per cent), 0.49 per cent (0.08 per cent) and 0.45 per cent (0.14 per cent). Cash to spot premium remained unchanged during the week at 7.40 with the liquidity influx into the markets.

The RBI interventions in the foreign exchange markets and demand from both refineries and institutional investors resulted in a compression of liquidity. This prompted the RBI to carry out one more round of Cash Reserve Ratio (CRR) cuts that released about Rs 40,000 crore into the system.

Along with the release of another Rs 25,000 as the first tranche of farm loan waiver compensation, the liquidity pumped amounted to Rs 65,000 crore. Besides the CRR cut, the RBI also allowed a temporary relaxation in the Statutory Liquidity Ratio (SLR) to the extent of 0.5 per cent of the banks’ net time and demand liabilities. This ratio mandates the quantum of deposits that banks are required to park in eligible Government securities.

Call money rates

The liquidity influx dragged down call money rates to 7 per cent towards the end of the week, away from double digit figures. The drop was more pronounced in the Collateralised Lending Obligations (CBLO) markets. CBLO volumes at around Rs 25,000 crore per day were higher than call trade volumes of about Rs 22,000 crore. In fact, the preference was to lend only against collateral. In fact, public sector banks’ overnight lending was mostly collateralised.

Bankers said that the collateralisation was done to secure their lending, given the turbulence in the financial markets. Large banks such as Punjab National Bank, however, remain highly liquid after having prepared for it. PNB’s Chairman and Managing Director, Dr K.C. Chakrabarty, said, “We have ample liquidity, but where are the borrowers.” PNB incidentally has remained a lender in the call markets through most of the year. The RBI’s liquidity influx notwithstanding, at the weekly Treasury bill auction, the cut-off yield on the 91-day T-bill was 8.69 per cent or up 21 basis points over the previous week.

But the spread between the weighted average yield and the cut-off yield was a steep 34 basis points. Traders said that the wide spread was in view of the low prices quoted by the non-competitive bidders. Non-competitive bidders, including insurers and mutual funds, shifted to government securities. Non-competitive bids amounted to Rs 2,000 crore and the total mop-up was Rs 7,000 crore as against a notified amount of Rs 5,000 crore. Interestingly, for the first time, the cut-off yield on the 182 T-bill papers at 8.68 per cent was lower than the 91 day T-bill yields. Traders said that this was because of expectations that banks have completely reversed their derisked portfolios and preferred longer maturity government securities. This trend was also evident from the movement in the ten-year yield to maturity (YTM). The 10-year YTM ended the week at 7.69 per cent on a weighted average basis shedding 26 basis points over the previous week.

Undertone bullish

The undertone remained bullish, though volumes were pulled down by the absence of sellers for dated securities. Bankers said that most of them preferred to hold on to securities for the moment. Although insurers were ready buyers, outright or through switches, there were few sellers. Average daily trade volumes last week were down to Rs 7,700 crore.

The outlook remained positive with more liquidity infusion measures expected during the next few days ahead of the peak season. The buy-sell spreads were just about 5-10 basis points implying high demand. Among the liquidity infusion measures expected were some redemption of market stabilisation scheme securities. Between October 3 and October 10 at least Rs 2,000 crore was redeemed. The redemptions brought down the outstanding MSS securities down to Rs 1.72 lakh crore from Rs 1.74 lakh crore.

Besides, inflation also was on the retreat, down to 11.4 per cent. Despite the inflation retreat, nominal yields across all maturities remained below inflation by at least 200 basis points. The negative real yields were largely on account of the chase for Government securities by banks. The chase for Government securities was on account of the accretion of bulk deposits with banks. The accretions came mostly from insurance companies and corporates that have pulled out of equities.

As a result, time deposits with the banking system this year so far was Rs 2.73 lakh crore, a 12 per cent increase over that in the corresponding period of last year. This growth was faster than credit growth, this year.

Credit growth this year was about 1.8 lakh crore or 7.7 per cent from the beginning of this year. But bankers said that credit growth could pick up further in the coming weeks, once peak season drawdowns start. It is at this stage that liquidity pressures are likely to intensify.