The Hindu Business Line : Bond yields retreat on low credit off-take

The uptick in bond prices (drop in yields) was partly supported by the Reserve Bank of India’s one percentage point hike in the Statutory Liquidity Ratio last week to 25 per cent. Traders said the hike was intended more as a signal against any upward momentum in yields.

But with most banks already overloaded with SLR securities, the impact was unlikely to last long, they added. Banks currently have government securities investment-deposit ratio of close to 33 per cent. SLR is the mandated pre-emption of bank deposits into government securities.

Besides, comments by the RBI Governor also indicated that more interventions are likely at the quarterly review of the monetary policy in January next year. The cues taken were that yields would remain circumscribed. What also powered the financial markets during the week were large non-debt inflows, mostly bunched exporter receipts. On the capital account, foreign institutional investors remained sellers. Net divestments by FIIs last week amounted to $73 .5 million (Rs 369.3 crore). FIIs sold both equity and debt. As a result, the rupee dropped to Rs 46.96 (Rs 46.45) against the dollar.

Forward cover

However, exporters and corporates that had tied external commercial borrowings took forward cover. This pulled down forward premia for one, three, six and 12 months to 2.46 per cent (2.71 per cent), 2.68 per cent (2.71 per cent), 3.02 per cent (3.25 per cent) and 2.97 per cent (3.21 per cent) respectively. Traders said that importers were hardly present in the forward markets. Even the short forward premia — cash to spot — declined to 2.33 per cent (2.36 per cent) respectively.

The fall in the short forward premia was partly due to the imposition of a cash reserve ratio in the collateralised borrowing/lending obligations market where some foreign banks were active. But large falls were prevented in view of the arbitrage opportunities open through the RBI’s reverse repurchase window, where the rate remains at 3.25 per cent.

The Non-Deliverable Forward (NDF — offshore rupee trading where settlement is done in foreign currency, mostly in US dollars) rupee-dollar exchange rate though depreciated to Rs 46.96 (46.52). Even at this level, NDF rate was lower than the domestic one-month forward rate by about 9 paise. But all eyes remain focused on next week’s meeting of the Federal Open Market Committee. The Fed is also expected to begin reversing monetary expansion slowly. The first signs of such an exit became apparent at the FOMC’s August meeting when it decided to slow the purchases of agency mortgage-backed debt. This move translated into a slowdown in dollar liquidity expansion.

Quantum Mutual Funds Fixed Income Fund Manager, Mr Arvind Chari said, “A lot of the cheap liquidity that they have spawned is moving out of the US thus weakening the dollar and creating asset froths in emerging markets. They will have to curb it sometime.”

Liquidity in the domestic markets remained comfortable. This was evident from the weekend Liquidity Adjustment Facility auction. Recourse to the reverse repurchase window was Rs 84,570 crore. But at the weekly Treasury Bill auctions yields remained firm. The cut-off yield on the 91 day T-bill was 3.23 per cent, unchanged from the previous week.

However, ten-year yields softened to 7.31 per cent on a weighted average basis down from the previous week’s 7.49 per cent. The softening was also partly on account of the absence of government borrowings during the week.

Average trade volume picked up to Rs 12,400 crore (Rs 8,021 crore) per day last week. The large purchases pulled down the one to 10 year spreads to 290 basis points, down from the previous week’s 301 basis points.

Narrowing spreads

The narrowing spreads were also triggered by anticipation of further interventions by the RBI to support government borrowings.

An HDFC bank review of the Credit policy said, “The Government is playing a critical role in driving the economy forward through its counter cyclical measures. As a result, its appetite for funds is extremely high (the analogue of a high fiscal deficit) and yet, the market seems a trifle unwilling to lend to the Government.”

So far, about 74 per cent of the Government borrowings were completed.

But State Governments are expected to step up market borrowings for the rest of the year. States have raised close to about Rs 80,000 crore of borrowings for the year and are expected to raise another Rs 30,000 to Rs 50,000 crore more for the rest of the year.

But traders also said that with credit off-take still remaining low and reduced government borrowings in the second half, yields could soften further in the coming weeks.

Further, deposit inflows remained buoyant. Time deposit accretion into the banking system has averaged Rs 2,000 crore since the beginning of this financial year. But credit off-take, both food and non-food, was just Rs 604 crore, translating into a funds excess with the banking system.

At this level, average credit deposit ratio for this year was just 30 per cent.

Some banks consequently have already frozen intake of bulk deposits in this situation. Certificate of deposits (CDs) rates are the preferred means for bulk deposit intake.

One-year CD rates are currently about 5.4 per cent. If the credit off-take slack continued, these rates could crash further.

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