The Hindu Business Line : G-secs set for stability after a rocky phase

"Government securities may not see a quantum jump in 2005, but the year may not necessarily be a negative one too,'' said a government securities trader at a primary dealership firm, which underwrites government debt sales.

Bankers seem to be apprehensive regarding the third quarter valuations of securities. Any sharp depreciation in the benchmark securities is likely to have a large impact on the third quarter financial results. The benchmark securities that the Fixed Income Money Market Dealers Association uses for valuation purposes have softened sharply recently.

Huge divergence: This was also one of the major reasons for the huge divergence between the weighted average 10-year yield and the benchmark yield.

Yields on benchmark securities have softened by nearly 23 basis points in less than two weeks. On December 29, the ten-year benchmark 7.37 per cent 2014 paper was at 6.59 per cent, while the 7.38 per cent 2015 paper was at 6.53 per cent.

Trades in the ten-year benchmark have been almost non-existent for the past month. On December 29, only a sole trade worth Rs 5 crore was conducted. The yield on the paper had shot up to 7.10 per cent in August.

The ten-year benchmark paper 7.37 per cent 2014 is showing a huge divergence of 81 basis points from the weighted average ten-year yield. The divergence is large compared to the beginning of 2004. The difference between weighted average yield of 10 year papers and the benchmark 7.37 per cent 2014 paper was a mere one basis point in January beginning.

Tight liquidity: In the first week of January, outstanding amount in repos with the RBI was about Rs 54,000 crore which increased to nearly Rs 80,000 crore in March. This amount as on the last reporting week was at Rs 8,000 crore. The dip in liquidity from its peak level of the year has been a whopping 90 per cent. Yield on the treasury bills have shot up by over a hundred basis points since the inception of the year. The 364-day T-bill ruling at 4.31 per cent in January beginning is 143 basis points higher now at 5.74 per cent. Yield on the 91-day bill has soared by 115 basis points to 5.41 per cent (4.26 per cent).

The country's forex reserves soared by a huge $3.794 billion to $130.717 billion for the week ended December 3, 2004, largest accretion seen in a week in 2004. Analysts are of the opinion that these inflows are mostly in the nature of investments by foreign institutional investors and hence subject to high volatility.

Inflation worries: Inflation is another worry weighing on the minds of market participants. Although for the last reporting week ended December 24, inflation was at 6.73 per cent. It had risen to a three- and-a-half year high for the week ended September 17 to 8.33 per cent.

Certain positive factors are also there for the government securities market, according to market participants. Outstanding balance of the Government with the central bank is nearly Rs 44,000 crore. With the oil prices falling for the past few weeks, inflation is expected to be lower that the peak levels seen. Liquidity is also expected to improve on account of interest payouts estimated at Rs 9,500 crore on special deposit scheme and investments by the country's largest pension fund in gilts.

The difference between the yields of the 10-year US paper and Indian paper has widened to 2.50 to 3.00 per cent in the recent times. This difference a year ago was 1.00 to 1.50 per cent. Market players said the widening yield difference augurs well for the Indian G-Sec market as interest rate differentials provide investment opportunities.

Rise in spending: Net borrowings of the Governmenthave been completed to the extent of Rs 32,684 crore, 36.17 per cent of the budgeted net borrowings of Rs 90,365 crore. The last quarter of the year might not only see increase in these borrowings, but also increased spending by the Government. The Tsunami disasterwill also lead to an increase in government spending.

A dealer at a public sector bank said, with the Government likely to spend heavily in January, the surplus of the Government with the central bank is likely to come down to Rs 10,000 crore. A likely increase in the outstanding limit under the market stabilisation scheme (MSS) is also a cause of apprehension.

MSS was introduced in April 2004 to absorb excess liquidity from the market, but the MSS auctions were not conducted for four consecutive weeks in November.

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