The Hindu Business Line : Yields firm on rise in global oil prices, NRI inflows

Traders said the upward bias in bond yields was also partly fuelled by fear that government borrowings may breach this fiscal year’s target. The fear was in view of shortfalls in tax revenues. In addition, statements by the Union Finance Minister, Mr Pranab Mukerjee, that fiscal stimulus was likely to continue for some more time supported market speculation.

At least 77 per cent of this year’s borrowings were completed after last week’s auctions. However, despite the absence of any open market operations through repurchase of government securities liquidity remained surfeit. The liquidity was partially driven by a surge in inflows into non-resident accounts. For the first six months, inflows through NRI accounts amounted to $2.7 billion or a 153 per cent increase over the corresponding period of the previous year. The increase was largely into non-repartriable rupee accounts implying that NRIs were increasingly beginning to shift their deposits home to avail themselves of the high interest rates here.

FII slowdown

The NRI deposit flows also partly neutralised the impact of a foreign institutional investor slowdown. FII net inflows last week into both debt and equity amounted to just $365.1 million (Rs 1,701.4 crore). But FIIs are increasingly expected to make exits from their investments ahead of the yearend to shore up their balance-sheets back home. NRI flows were also supported by current account inflows, mostly exporters’ remittances. As a result, despite the oil companies’ presence, the rupee appreciated slightly against the dollar to Rs 46.5 last weekend. Forward premia for one, three and 12 months also narrowed slightly. Only the six months forward premium remained steady as refiners hedged in this tenure. As a result, forward premia ended the week at 1.87 per cent (2.15 per cent), 2.35 per cent (2.43 per cent), 2.73 per cent (2.73 per cent) and 2.71 per cent (2.73 per cent) respectively.

Short forward premium – cash to spot — narrowed slightly to 2.32 per cent (2.35), as foreign banks reduced their sell-buy swaps. Normally, short forward premium remains high during the weekend as foreign banks swap and park the same in the RBI’s reverse repurchase window at 3.25 per cent. But the deceleration in FII flows reduced the sell-buy swaps.

The rupee, however, was expected to remain ranged during most part of this year, despite the inflows. This was on account of increased refinery activity in the foreign exchange markets as the oil import basket price edged closer to $80 a barrel. Movement of the non-deliverable forward (NDF — offshore rupee trading where settlement is done in foreign currency, mostly in US dollars) rate manifested this trend. NDF rupee-dollar ended last week at Rs 46.59 (Rs 47.14) almost level with the domestic one month forward rate.

The comfortable liquidity conditions were evident from the high recourse to reverse repurchase window at the weekend Liquidity Adjustment Facility auction. Recourse to the reverse repo window amounted to Rs 96,930 crore. The liquidity overhang though had little impact on the weekly Treasury Bill auctions. At the weekly auctions, the cut-off and weighted yield on the 91-day T-Bill was 3.28 per cent unchanged from the previous week. The high liquidity also failed to support the Government borrowing auction through reissue of the 7.02 per cent 2016, 6.90 per cent 2019 and the 8.24 per cent 2027 securities. The securities were placed at YTMs (Yield to Maturity) of 7.36 per cent, 7.34 per cent and 8.28 per cent respectively. Traders said although the average ‘bid to cover’ ratios for the auctions were high at 2.36 per cent, some bids were high resulting in pushing up cut-off yields. The firm yields at the auctions pushed up the ten-year weighted average YTM to 7.35 per cent (7.32 per cent).

Trade volumes

Trade volumes, however, improved slightly last week. The average daily trade volume was Rs 10,700 crore (Rs 9,400 crore). The increased trade volume was partly on account of switches by the Life Insurance Corporation of India and some provident funds. LIC, for instance, sold some of its shorter tenure securities and purchased longer tenure ones , mostly preferring the 8.33 per cent 2036 and the 6.83 per cent 2039 per cent securities. The switches resulted in shrinking the inter-yield spreads.

The spread between one and 10 years was down to 280 basis points, lower than comparable dollar treasury spreads, that was 312 basis points. The large-scale insurance purchases resulted in a shortage of long tenure securities. Both the 8.33 per cent 2036 and the 6.83 per cent 2039 have virtually disappeared as insurers tend to hold such securities till maturity.

Weak credit off-take

Banks preferred to remain liquid. This was because some large projects, especially infrastructure sectors projects, were expected to go into financial closure and help credit off-take to improve. Credit off-take, so far, has remained weak. Incremental credit deposit ratio this year, so far, was only 30 per cent or a third of what it was in the corresponding period of the last fiscal, as corporate credit demand remained weak.

Inflation worries kept traders wary of possible RBI intervention. Food price inflation is currently 13.68 per cent. This left little flexibility for bonds to move down. Traders consequently preferred to remain at the short-end of the yield curve. Besides, bankers said some funds were encashing their investments in Certificates of Deposits and shifting to corporate debt. One year CD rates are currently lower than one-year term deposits by at least 100 basis points making them unattractive.

Corporate debt trade volumes, as a result, were now about Rs 900.92 crore per day, particularly public sector, FI/Bank and Triple “A” rated papers.

The chase for corporate debt also resulted in pulling down the risk spreads. Sovereign to Triple “A” corporate spreads are down to 150 basis points. However, shrinking spreads hardly implied that risk appetites were on the increase. The low spreads were only for public sector corporates. But as the cost of deposits decrease, private sector corporate spreads are also expected to fall in the coming weeks.

Related Stories:
Yields steady as markets remain unaffected by global oil prices
Banks may park excess funds in short-term debt instruments