The Hindu Business Line : Yields head south as inflation, oil prices continue to slide

Traders said that firm bond prices (soft yields) were also fuelled by large deposit inflows into the banking system. Banks have been seeing deposit inflows of at least about Rs 4,000 crore per day. The deposit inflows were largely from investors fleeing from the equity markets.

The deposit inflows, in turn, triggered a demand for government securities from banks to maintain the mandated Statutory Liquidity Ratio (SLR) of 24 per cent. Under the current regulations, banks are expected to invest a minimum of 24 per cent of their net demand and time liabilities into government securities. However, the incremental government securities to deposits ratio is currently close to the SLR.

Traders said that the demand was also triggered by the Reserve Bank of India’s refusal to agree to bankers’ request to make subsidy and other public sector bonds eligible for SLR. Such a move would have released at least Rs 1.5 lakh crore of liquidity.

Besides, bankers said, last week, expectations of further monetary policy interventions, in the form of a reduction in the cash reserve ratio (CRR), failed to take place. Instead, the RBI exempted liquidity support to banks for meeting credit requirements of housing finance from the SLR. The delay in policy intervention was partly due to the terrorist strikes in the financial capital, traders said.

The interventions that were expected include a reduction in the repo-reverse repo band to 100 basis points. Currently, the reverse repurchase rate is 150 basis points, with the repo at 7.5 per cent and the reverse repo at 6 per cent. (The repo is the rate at which the RBI provides liquidity support to banks against collateral of designated government securities. In the reverse repo, the RBI mops up liquidity from banks through sale of government securities).

The expectations were driven by retreating inflation that dropped to 8.84 per cent. Inflation retreat was also helped by falling global oil and commodity prices. The oil import basket price is now down to $46 a barrel and is poised to sink even further.

Refiners, though, took forward cover taking advantage of the firm rupee against the dollar . The rupee firmed to Rs 49.84, up from last weekend’s level of 50.03.

Forward premia

The exchange rate at this level resulted in a hardening of forward premia across all maturities. Forward premia for one, three, six and 12 months firmed to 7.46 per cent (6.60 per cent), 4.64 per cent (3.98 per cent), 2.98 per cent (2.43 per cent) and 3.75 per cent (1.68 per cent). The firming of the rupee was partly triggered by exporters’ repatriation and large inflows of foreign currency non-resident deposits.

Liquidity, however, tightened slightly during the week, largely on account of the outflows by foreign institutional investors and high credit demand. This was reflected in the recourse to the repurchase window at the weekly liquidity adjustment facility auction. Recourse to the repo window amounted to Rs 12,250 crore. But, some liquidity surplus public sector banks also parked Rs 7,000 crore in the reverse repo window.

CD floats

The temporary liquidity surplus was partly on account of the certificate of deposit (CD) floats by some banks. During last week alone Rs 1,000 crore of CD resources were raised by banks, stimulating a demand for government securities. Some of the resources were also parked in Treasury bills. As a result, at the weekly T-Bill auctions, the cut-off yield on the 91-day fell to 7.14 per cent down 17 basis points over the previous week.

The weighted yield dropped to 7.10 per cent or 16 basis points over the previous week. But the fall was sharper in the case of the 182-Day T-bill as banks preferred to move to longer dated securities. The cut-off yield on the 182 day T-bill was 7.06 per cent or 8 basis points lower than the 91-day bill. The preference was also evident from the high bid to cover ratios. High ratios imply preference for securities. The ratio was 238 per cent for 91-day T-bills and 328 per cent for 182 day bills.

The preference for long dated securities reflected in the ten-year Yield to Maturity (YTM) that dipped to 7.16 per cent on a weighted average basis from 7.24 per cent last week.

High trade volumes

The positive undertone was evident from the high trade volumes. Trade volumes per day averaged Rs 14,400 crore last week. That the demand was driven by deposit inflows was evident from the equity trade volumes at the National Stock Exchange. Last week, the average turnover per day last week in the NSE was Rs 8,900 crore.

Besides, credit demand remained high. This was evident from the high incremental credit deposit ratio. The ratio was in excess of 90 per cent. The Vijaya Bank Chairman and Managing Director, Mr Albert Tauro, said, “If this (credit) demand continues, liquidity may not be sufficient for sustaining the credit flow.” Corporates, unable to access foreign credit lines, continue to draw down on domestic lines, keeping rates high. Spreads between Triple A and sovereign papers were about 600 basis points.

The high spreads indicated that liquidity tightening in the credit markets was far from over. Moreover, banks still face outstanding pipeline disbursements, particularly to big ticket infrastructure sector.

Deposit growth, despite growing at 24 per cent on a year-on-year basis, is yet to keep pace with credit growth, bankers said. As a result, working funds would require to be augmented in the coming weeks.

For the immediate requirements the preference was for short-term resources through CDs . Some of the new 90-day CD floats were done at rates as low as 9 per cent.

Bankers anticipate that these funds could be refinanced with even lower rates in the coming weeks, as reverse disintermediation gathers pace. For pushing the rates down, banks looked towards the RBI for overcoming the approaching tight liquidity.

Related Stories:
Bonds rally on receding inflation, rise in bank deposits
Yields fall on deposit inflows, RBI intervention

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