The Hindu Business Line : G-Sec trading volumes dip over political uncertainty

Uncertain times
Foreign banks, private sector banks and primary dealers are believed to have turned risk-averse
Public sector banks are, however, actively buying Government securities

K. Ram Kumar
Priya Nair

Mumbai, May 13 Uncertainty surrounding Government formation appears to have taken a toll on the Government securities market with traded volumes shrinking by almost 60 per cent between the first phase of polling on April 16 and the fifth and final phase of polling on May 13.

On April 16, when the first phase of polling to the 15th Lok Sabha was held, traded volumes were at Rs 18,315 crore while on the fifth and final phase of polling on May 13, the volumes had declined to Rs 7,370 crore.

Due to the ‘event’ risk associated with the outcome of the general elections, aggressive traders such as foreign banks, private sector banks and primary dealers are believed to have turned risk-averse and lightened their treasury portfolio.

Public sector banks, however, have not lost their nerve. They are actively buying Government securities and transferring them to the Held-to-Maturity bucket to avoid mark-to-market provisioning, should interest rates harden down the line.

Their move stems from the fact that if a stable alliance assumes reins at the Centre, then yields would definitely thaw and they could reap treasury gains.

“There is jitteriness in the market. Traders have turned risk averse and are sitting tight, waiting for the elections results to unfold. They do not want to take huge positions and get caught on the wrong foot should yields move up,” said Mr N.S. Venkatesh, Managing Director & CEO, IDBI Gilts Ltd.

The treasury head of a large public sector bank, which is actively accumulating Government securities, said he did not see “any great election blues” as liquidity, underscored by the amount of surplus parked by banks with the Reserve Bank, was the primary driving force in the market.

Due to sagging credit appetite in the economy, banks have collectively been parking over Rs 1 lakh crore daily with the RBI during the last few weeks.

“We don’t see much of an event risk. We have been buying at every peak (yield). If a stable Congress-led or BJP-led Government comes to power then the bond market will raise a toast, with yield on the benchmark 10-year security possibly testing sub-six per cent levels. However, if the Third Front cobbles together a disparate coalition Government, then the yield could go beyond 6.50 per cent. Irrespective of whichever party comes to power, the Government borrowing will go on. The market has already discounted a coalition government.” said the banker.

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