The Hindu Business Line : Bonds remain steady on profit booking

Traders said that corporates and importers made large dollar purchases for settling their cross border liabilities. In fact, traders said that some corporates also drew down on their domestic credit lines for the purpose, prompting banks to liquidate some of their securities holdings. This prevented bond yields from softening from the current levels.

However, foreign institutional investors (FII) remained net buyers, though some began increasing their interests in the domestic debt markets. FII net investments last week were $831 million (Rs 4,165 crore). FII investments in debt alone amounted to $397.9 million (about Rs 1,990 crore).

Oil companies stayed away from the foreign exchange markets during the week. This was in view of RBI’s continued support through the special market operations (SMO). Under the SMO facility, oil companies sell the bonds issued to them by the government against subsidy overdues to the Reserve Bank of India. Against bonds sale, equivalent foreign exchange is released to the public sector refineries. Last week, about Rs 2,375 crore (about $48 million) was released to the PSU refineries. India’s current level of oil imports are estimated at about 2.7 million barrels per day. Oil companies have been using the SMO window continuously since the window was opened in June 2008.

But foreign banks, especially American banks, resorted to sale of bonds. US banks’ bond sales in the domestic markets come close on the heels of reports of the US banking regulator, the Federal Reserve Board, raising capital requirements after stress testing of assets. Among the US banks facing enhanced capital requirements include the Citigroup, Bank of America and JP Morgan Chase. All these American banks have substantial presence in the country. The US Treasury is expected to disclose the actual capital requirements on May 7 this year.

Forward premia

The sell-out of securities and consequent large purchases of dollars, both spot and forward by American banks, pushed down the exchange rate to Rs 50.22 per dollar last week from the previous week’s Rs 49.94. The forward cover also premia firmed slightly as a result. Forward premia for one, three, six and 12 months firmed to 3.76 per cent (3.63 per cent), 3.45 per cent (3.27 per cent), 2.89 per cent (2.77 per cent) and 2.29 per cent (2.17 per cent). Short forwards, especially cash to spot premium, hardened as foreign banks sold cash dollars for spot ahead of a long weekend. But available indications point to a slight hardening of exchange rates. The indications were from the Non-Deliverable Forward (NDF — offshore rupee trading where settlement is done in foreign currency mostly in dollar)

Despite the sell-off by foreign banks, liquidity remained surfeit. This was evident from the high recourse to the reverse repurchase window at the weekend liquidity adjustment facility auctions. The recourse to the reverse repo window amounted to Rs 89,350 crore. The high liquidity manifested at the weekly Treasury Bill auctions. The 91-day T-Bill cut-off yield dipped to 3.32 and the weighted yield to 3.28 per cent, close to the reverse repurchase rate of 3.25 per cent. The cut-off yield on the 182 T-Bill was 3.55 per cent.

The ten-year yield though firmed slightly to 6.20 per cent on a weighted average basis, up from the previous week’s 6.11 per cent. Trade volume remained high averaging Rs 17,700 crore per day last week though it was down Rs 2,600 crore from the previous week. Equity trade volume was even lower at Rs 14,725 crore per day, indicative of the institutional preference for debt.

But along with FIIs even domestic mutual funds increasingly shifted to debt papers, especially Non –SLR (Statutory Liquidity Ratio) Government papers that included FCI, SBI rights and some oil bonds. Interests in these securities were largely on account of the high yields. The run for these securities pulled down the spreads. Spreads that were over 150 basis points over SLR sovereign debt are now down to about 70 basis points. But the largest buyers for these categories of securities, especially those with long maturities were insurance companies, particularly the Life Insurance Corporation of India.

Outlook buoyant

Traders said that the outlook for bonds remained buoyant. This was largely on account of large influx of deposits into the public sector banking system. The Syndicate Bank’s General Manager Treasury and Investments, Mr Vinay Ranjan, Rao, said, “With deposits flooding the banking system, yields are likely to soften further.”

Incremental investment deposit ratios were high, but if the current pace of deposit accretions of about Rs 7,000 crore per day continued, the ratios could fall sharply and drive down yields. Bankers said that despite some banks pruning term deposit rates, accretions continued unabated as investors looked for safe investment havens. That yields could soften further was also supported by the current inflation trend. Inflation is in the sub-one per cent zone at 0.57 per cent. This translated into a one real yield of 3.7 per cent. The low inflation allowed for some sharp reduction in interest rates. HSBC’s Senior Asian Economist, Mr Robert Prior Wandesforde, said, “We are expecting just one more 25 bps repo and reverse repo rates reduction, probably coming after the general elections and assuming that the new government doesn’t unveil a huge new stimulus package.”

Sharp reductions in administered rates or savings bank rates are also inevitable but more likely only after the middle of this month after a new Government assumes power, since it is politically sensitive. In the meanwhile, public sector banks are expected to keep tweaking time deposit rates and pave the way for lending rate reductions, since few banks are prepared to compromise on their interest margins. Some term deposit rates are likely to come close to the current savings banks rates or even lower.