The Hindu Business Line : NBFCs active players in securities market

Bankers said that oil continued to be a major cause of worry since international prices have already shot up close to $54 per barrel. Imports are in the region of about two million barrels per day (2.72 lakh tonnes) and are expected to rise further based on this year's projected GDP growth.

What has neutralised so far the high international oil price impact was the large current account and non-debt capital inflows, which allowed the rupee to appreciate. But, some of the hedge funds that contributed to the inflows in the past are encashing their participatory notes.

Bankers said the funds were also heavily moving into commodities, particularly oil futures anticipating prices to harden further. The flight of hedge funds has led to the erosion in the foreign exchange reserves by $1.6 billion since the beginning of this fiscal.

Govt borrowings: Delayed monsoon was also a cause of worry, bankers said. This could take the sheen of credit demand and escalate government borrowings way above the targets envisaged for the current year. This in turn could impact yields and , they added.

These many bankers to stick to remaining liquid. The preference for liquidity was evident from the response at the reverse repo auctions. At the last week-end's reverse repo auction, the response was about Rs 26,000 crore. The trend in the daily reverse repo auctions was also identical.

Reverse repos: This preference ensured that at the 91-day Treasury bills auction, the cut-off yields at 5.20 per cent remained steady last week, at previous week's level.

at the 182- dayTreasury bills auction, the yield was 5.35 per cent, almost the same as in the previous auction a fortnight ago.

Bankers said that their interest was focussed only at remaining liquid during the next few months, as they were sitting on substantial quantity of government securities.

No more G-Secs: This has ensured that they do not require more government securities for meeting even the statutory liquidity ratio since their average investment-deposit ratio was well over 44 per cent.

Despite bankers' restraint the yields softened.

The 10-year YTM dropped below 7 per cent last weekend on a weighted average basis to 6.98 per cent, from the previous week's 7.05 per cent.

In fact, during the last two weeks, the 10-year yield has belied expectations and softened.

One of the major factors behind this was the presence of insurance companies, corporates and non-banking finance companies.

NBFCs active: Entities such as NBFCs have become active players in the G-Secs market with the almost full restoration of the ready forwards market after more than a decade.

Yet, bankers said that expansion in the repo markets alone was insufficient for the yields to remain soft.

Major players would continue to be banks and insurance companies. Banks have remained at the short-end of the yield curve since the last few months.

Insurance companies, particularly life insurers, are at the long end of the curve. But bankers said life insurers would not be able to push down yields for long, as it could have a direct impact on the returns to policyholders.

Yield on investments: Already, the mean yield on investments for the LIC, the largest non-bank player in the G-Secs market, was below 7 per cent.

Falling yields were likely to impact the bonus to policyholders, they added. Besides, for other large buyers such as the provident funds, the situation was even more serious.

Provident funds currently pay about 9.5 per cent and at the current yield levels it would mean a deficit of at least 1.5 per cent.

That it was the Fringe players determining the markets was increasingly evident from the trading volumes.

On the face of it trading volumes appear to have increased. Around 40 per cent of the trading volumes or about Rs 2,000 crore were in treasury bills. Only the remaining volumes were in the dated securities and State development loans. Only insurers are interested in State loans and long-dated securities in current market conditions.

Bankers said that it was this insurers' interest that was expected to help the planned Rs 10,000 crore Government securities issue. The float in the nature of reissue, comprised 10.25 per cent 2021 (Rs 4,000 crore) and 7.37 per cent 2014. The former is of definite interest to life insurers, traders said, in view of the high coupon. Traders said that the pricing of this security was likely to be near 7.20 per cent.

The RBI though has played it safe by fixing the underwriting fees for the 9-year paper at five paise and 19 paise for the 16-year paper. The shorter dated paper was expected to face some difficulties given the fact that most banks have preferred to shrink the maturity of their investment books. .

Real yields: Despite the retreat in inflation to 5.38 per cent, real yields continue to be narrow. One-year real yields are just 20 basis points above inflation.

Traders said that the pressure was also likely to mount in the coming weeks if the government goes ahead with the hike in petroleum prices.

Forex inflows: Foreign currency flows during the last two weeks remained low and reserves for the week ended May 27 were at $139.829 billion.Credit demand has picked up, traders said.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
NBFCs active players in securities market

Manappuram Finance to give 12 pc dividend

Assocham pitches for rural home loans at 6 pc interest

PSBs wary of differential pay packages

Oriental Bank targets 35 pc growth in AP

South Indian Bank looking at small North-based banks