The Hindu Business Line : Yields steady as markets remain unaffected by global oil prices

Traders said the weekend action or inaction of the Federal Open Market Committee (FOMC) also helped yields remain steady during the week. The FOMC inaction in changing the key Federal Funds rate (rate at which US banks lend overnight reserve funds to each other) from the current level of 0.25 per cent was widely discounted by markets worldwide.

However, the FOMC statement made it clear that the agency/mortgage debt (asset-backed papers, mortgage-backed papers and other classes of commercial lending papers) purchases were likely to slow down. The Federal Reserve's target is $1.25 trillion. The move gave an eight-week reprieve for traders during which the dollar would remain a carry currency.

Domestic foreign exchange markets, however, were more influenced by non-debt capital movements. Foreign institutional investors' net investments decelerated to $371.5 million (Rs 1,746 crore). In addition, non-resident non- repatriable deposits pushed up the exchange rate.

But oil import prices are now about $79 a barrel. Oil companies were making a beeline to the markets, drawing down on their credit lines, which though had little impact on exchange rates. Besides, the Reserve Bank of India's large gold purchases from the International Monetary Fund also failed to impact exchange rates. Traders said that the RBI had sourced the foreign currency from their existing investments, including sale of some long-term US Treasury bonds.

Forward premia

The rupee-dollar exchange rate, in fact, appreciated to Rs 46.82 (Rs 46.96). In addition, exporters and corporates that had lined up cross border funding took forward cover. As a result, forward premia for one, three, six and twelve months appreciated to 2.15 per cent (2.46 per cent), 2.43 per cent (2.68 per cent), 2.73 per cent (3.02 per cent) and 2.74 per cent (2.97 per cent) respectively. Short forward premia remained unchanged as foreign banks continued to use the RBI's reverse repo window for arbitrage, though sell-buy swaps.

However, despite shrinking forward premia, the downside risks on exchange rates remain high. This was evident from the high Non- Deliverable Forward (NDF - offshore rupee trading where settlement is done in foreign currency, mostly in US dollars) rate. The NDF rate for the rupee was Rs 47.14 (Rs 46.96) or about 20 paise higher than the domestic one month rate.

Liquidity remained comfortable. This was evident from the high recourse to the reverse repurchase window at the weekend liquidity adjustment facility (LAF) auction. Recourse to the reverse repo window amounted to Rs 1,19,800 crore. The high liquidity partly helped the Government borrowing auctions for Rs 9,000 crore. The securities offered were the 7.32 per cent 2014, 6.35 per cent 2020 and the 7.50 per cent 2034. The securities were placed at 7.09 per cent, 7.77 per cent and 8.34 per cent respectively. With this round of auctions, the gross borrowing till last week amounted to Rs 3.34 lakh crore or about 74 per cent of the current year's estimated target.

Unlike, in the last few auctions the average `bid to cover' ratio improved to 2.2 times. But bankers said that the interest in the auctions was largely on account of low credit demand. The low credit demand left banks with few alternatives other than parking funds in government securities. Credit off-take is down to a 12-year low. Incremental credit deposit ratios this year, so far, is down to 28 per cent after slightly improving to 30 per cent

Short-term yields, however, firmed. At the weekly Treasury bill auctions, the cut-off yield on the 91-day T-bill was 3.28 per cent (3.23 per cent) and the weighted yield was 3.24 per cent (3.19 per cent). The cut-off yield on the 364-day T-bill was 4.5 per cent. However, the ten-year yield to maturity ended the week at 7.32 per cent on a weighted average basis almost unchanged from the previous week's level of 7.31 per cent.

Trade volumes decline

Trade volumes dropped last week, as banks curtailed purchases. The average trade volume per day was Rs 9,400 crore last week or down Rs 3,000 crore over the previous week. Bid-offer spreads widened reflecting the trader disinterest. The disinterest in Government securities was in view of the already large government securities portfolios with the banks. Banks currently have G-sec investments in excess of 32 per cent of their gross deposits, as against the mandated statutory liquidity ratio of 25 per cent.

Yet, the high food price inflation at 13.4 per cent and the RBI's phased exit from monetary expansion kept traders on tenterhooks. Traders preferred to stay on the lower end to the yield spectrum to remain derisked. As a result, short-term yields are likely to see some correction in the coming weeks. This is also apparent from the widening yield spreads. The one to ten-year spreads are currently in 295 basis points.

Besides, institutions like the Life Insurance Corporation are also staying away from the bond market anticipating large sell-offs by mutual funds. This was in view of a planned exit by some banks from mutual fund investments. Banks have so far invested about Rs 1.51 lakh crore into mutual funds. Accordingly, traders said banks' redemptions were expected to trigger mutual funds sell-off in PSU and corporate bonds. Traders said the insurers consequently preferred to wait for the yields to harden when the sell-off begins.

However, traders said medium and long-term G-Sec yields are likely to remain ranged. As a result, the banks' yield on funds is likely to remain under pressure. With credit off-take still dull, limited flexibility to push up G-sec yields, the focus shifted to managing liabilities. Banks are now beginning to prune deposit rates to improve their CD ratios. The SBI group has already begun snipping away at deposit rates.

But other banks were more circumspect and preferred to discourage the volatile deposits. The obvious target was certificates of deposits. These rates are likely to come under pressure in the coming weeks.

Related Stories:
Bond yields pause on slow Govt borrowings, rise in FII inflows
Bond yields retreat on low credit off-take

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