The Hindu Business Line : 10-year yields dip as corporates are back

Following the re-entry of corporates into the G-Secs market, the build-up of short-term time deposits and demand deposits within the banking sector has slowed down.

Bangalore , May 24

AFTER a gap of almost a year, corporates have returned to government securities for parking their cash surpluses and improve their treasury earnings.

Banking sources said that the return of corporates into the G-Sec market was prompted by the Reserve Bank of India's (RBI) notification permitting them to participate in ready forwards.

This included both repos and reverse repos (sale/purchase of securities and buying/selling back the same at a predetermined price and date).

The notification prescribed that the corporate ready forwards would have to be for a minimum of seven days.

Bankers said that the return of corporates resulted in increasing the number of players in the G-Sec markets, confined till now only to the banks, insurance companies and to a lesser extent, mutual funds.

The impact of the notification, they said, was almost immediate, resulting in 10-year yields dipping sharply.

Currently, the 10-year yield-to-maturity (YTM) is 7.02 per cent. A week back it was close to 7.3 per cent.

The corporate/mutual fund shift to Government securities was triggered by the improved liquidity as a result of them being permitted to participate in repos/reverse repos.

Since last year, corporates and mutual funds have preferred parking their cash surpluses in short-term time deposits.

This resulted in generating yields of barely four per cent. On the other hand, bankers said in the g-secs market they were in a position to generate returns of over 5 per cent, well above the RBI's reverse repo rate.

Corporate and mutual fund preference was mostly for the 91-day Treasury bills, which have the highest liquidity among all government securities.

Another paper favoured by the corporates was the 7.38 per cent 2015, which is currently the benchmark security for determining the 10-year YTM.

As a result of the sudden influx of corporates into G-Secs, bankers said, the build-up of short-term time deposits and demand deposits within the banking sector had slowed down.

The slowdown in bulk deposit accretions resulted in a reduction in liquidity mop-ups through the RBI's reverse repo auctions. The slowdown was evident from the reduced reverse repo mop-ups by the RBI.

Since last week, the RBI mop-up through daily reverse repo auctions was only about Rs 12,000 crore. Two weeks back, the mop-up averaged Rs 25,000 crore.

For most banks this slowdown in short-term and demand deposits was a welcome development, since it considerably mitigated the problems of liquidity mismatches.

In fact, the banking sector's focus was on increasing the retail deposits. These deposits, bankers said, were available for considerably longer periods than bulk deposits.

Retail saving account deposits are treated by some of the banks as long-term resources.

Bankers said that the softening yields in the bond markets would now enable Government borrowings to proceed without resistance, unlike the last few auctions, where the RBI had to offer high yields and high underwriting fees to ensure full subscription of the Government, leading to an escalation in the issue costs.

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