The Hindu Business Line : Yields fall on deposit inflows, RBI intervention

Traders said that the yield dip also stemmed from Reserve Bank of India’s interventions. The RBI infused Rs 10,000 crore of liquidity, through repurchase of two Market Stabilisation Scheme securities — the 6.65 per cent 2009 and the 5.87 per cent 2009. The securities were repurchased at a yield to maturity (YTM) of 6.78 per cent and 6.88 per cent respectively.

The comfortable liquidity conditions saw more banks taking recourse to the reverse repurchase window at the LAF (Liquidity Adjustment Facility) auctions. The recourse to the reverse repo window amounted to Rs 9,800 crore and was parked in the RBI’s reverse repurchase window. In addition, foreign institutional investors (FIIs) invested about $155 million last week, further increasing the liquidity.

Exchange rate

However, traders said importer and refinery purchases pulled down the rupee-dollar exchange rate sharply to Rs 49.46 per dollar. Refiners rushed to hedge payment obligations. Refiners’ demand stemmed from the sharp fall in global oil prices. The import basket price of oil is currently at $48 a barrel, the lowest level since April 2005. However, the depreciation in the spot exchange rates enticed exporters to hedge their forward receivables.

As a result, forward premia softened up to six months. Forward premia for one, three and six months eased to 6.16 per cent (7.07 per cent), 3.82 per cent (4.44 per cent) and 2.61 per cent (2.81 per cent). However, one year forward firmed slightly, as importers, particularly capital goods importers and corporates with external liabilities, took long forward cover. One-year forward premium, as a result, firmed slightly to 2.03 per cent (1.95 per cent).

Cash to spot forward premium also firmed to 7.28 per cent (5.03 per cent) as foreign banks resorted to sell-buy swaps to take advantage of the interest rate differential. The differential continued to remain wide, with the Fed funds rate at 0.35 per cent and the domestic call rates at 7.25 per cent. This differential provided arbitrage opportunities for some of the American banks.

The differential triggered speculation of a possible cut in the reverse repurchase rate. The reverse repurchase rate currently acts as a floor rate, below which call rates seldom drop. HSBC Global Research India Watch Issue has already forecast a further drop in policy rates. The forecast said, “At this stage, we look for 150 basis points more off the repo rate, 100 basis points from the CRR and a 50 basis points reverse repo rate reduction.”

T-bill auctions

Hints of a possible reduction were evident from the trend in the Treasury bill (T-Bill) auctions. Last week’s T-bill auctions saw the cut-off yield on the 91-day T-bill at 7.35 per cent, only down 4 basis points over the previous week. The weighted yield on the 91-day bill was 8 basis points lower. But it was the trend of the 182 day T-bill that pointed to a sharp reduction. The cut-off yield was 7.21 per cent or 14 basis points lower than the 91-day T-bill. That yields could move down was also evident from the bid-to-cover ratios. The bid-to-cover ratio indicates the preference for securities. High ratios implied high demand. The bid-to-cover ratio at the 91-day T-bill auction was 1.93 times. For the 182 day T-bill, the ratio was 2.66 times.

At the auction of the Government securities the high bid-to-cover ratios helped pull down the YTMs. The bid-to-cover ratios for the 7.56 per cent 2014 and the 7.95 per cent 2032 (reissue) were 3.69 times and 2.95 times. This allowed the cut-off YTM fixation at 7.38 per cent (lower than the repo rate of 7.5 per cent) and 8.22 per cent respectively. The issue of the state development loans also benefited from the high demand situation, as yields dipped to 8.2 per cent.

The preference for long-dated securities pulled down the ten-year YTM to 7.52 per cent last week, on a weighted average basis, from the previous week’s level of 7.72 per cent.

Traders said that the softening was largely on account of mounting deposit inflows into the banking system. In October alone, time deposit accretions amounted to Rs 94,000 crore. The incremental credit deposit ratios also remained high during the period at 147 per cent, as credit off-take remained high.

But bankers said that deposit inflows would continue. This was largely on account of reverse disintermediation. A pointer to that direction was the mounting daily trade volumes. Last weekend alone, the trade volume in G-secs was Rs 12,600 crore. In the National Stock Exchange, the turnover for the same day was Rs 10,800 crore.

Bankers said that this kind of situation was expected to help them bring down deposit rates. What also favoured the slippage of interest rates was the drop in inflation to 8.98 per cent. Nominal yields, across the yield spectrum, still continued to remain above inflation.

The negative real yields notwithstanding the outlook for bonds, as a result, remained positive. Traders said demand was expected to remain high for meeting the Statutory Liquidity Ratio (SLR) requirements. The demand was evident from the thin-bid offer spreads that are just 5 basis points. In fact, the nominal investment deposit ratio is barely 27 per cent and the incremental ID ratio was far lower at 10 per cent.

Besides, traders said, that some of the banks were beginning to spruce up their trading books. Public sector banks currently have only a small quantum of their investments in the trading books. That was likely to increase in the coming weeks as banks prepare to book treasury profits.