The Hindu Business Line : Banks shed longs to meet credit demand

Bankers saidthe 25 basis points hike in the US Federal funds and the Federal discount rates had little impact on domestic markets because they had already discounted the increase.

What also failed to impact the market was the hike in crude oil prices. Oil prices surged to a record $66 a barrel during the week or close to about $495 per tonne. The rising prices would result in pushing up the energy import bill of the country. In fact, most oil companies were in the foreign exchange market.

Despite their presence, yields were mostly unaffected on account of the large forex inflows.

Abundant liquidity: As a result, the markets were awash with liquidity, evident fromthe week-end reverse repo auctions.

At these auctions, the Reserve Bank of India mopped up close to Rs 38,000 crore of liquidity. The high liquidity was also reflected in the RBI's Treasury bill auctions.

At the 91-day T-bill auctions, yields dropped to 5.24 per cent from previous week's 5.32 per cent. In the 182-day T-bill auctions, the yields were 5.46 per cent. At both these auctions, the weighted average yields were lower than the cut-off yields.

The weighted average yields in the 91-day T-bill were 5.20 per cent and in the 182-day T-bill were 5.43 per cent respectively. The high liquidity also allowed for placement of 8.07 per cent 2017 and the 7.5 per cent 2034 papers at yield to maturities (YTMs) of 7.16 per cent and 7.44 per cent respectively.

Despite this high liquidity, the 10-year YTM hardened to 7.12 per cent from 7.06 per cent the previous week.

Bankers' preference: Bankers said that one of the major factors leading to the contrary trend was their preference for short-dated securities.

In fact, most of such replacements of long-dated securities with short dated ones were done through switches with life insurance companies. Bankers said that some of them sold their portfolios of the 10.47 per cent 2015 at yields of 7.17 per cent and simultaneously picked up securities such as the 11.40 per cent 2008.

This allowed them to remain liquid. But this shift ensured that the spreads between one year and 23 years remained steady at 172 basis points against previous week's 175 basis points.

Outlook steady: Moreover, bankers said the outlook was steady partly because credit remained as their primary focus.

Bankers were prepared to incur some losses in outright trades since they hoped to offset them through profits in credit operations.

Consequently, banks were little interested in building up investments at this juncture, especially in view of their high investment-deposit ratios. Bankers said that they would prefer reducing their holdings to the 25 per cent statutory obligation before the Basel norms.

Bankers said the sale of securities was unlikely to drive up yields too highon account of the large presence of insurers, especially the LIC, which has a high appetite for G-Secs.

Further, with inflation falling below 4 per cent, the one-year real yields were close to 1.9 per cent, leaving little room for any big increase in nominal yields.

Besides, the liquidity build-up driven by foreign currency inflows was expected to continue for some more time, evident from the reversal of the inversion in the forward premium curve. Till about two weeks ago, forward premia for one month was higher than that for six and 12 months.

Forward premia trends: Last week, however, the trends reversed and the one-month forward premia was down at 0.25 per cent and the 12-month at 0.8 per cent.

One of the major factors driving down forward premia were non-debt capital account and current account inflows. These inflows have suddenly picked up and are now upwards of $150 million a day. This surge has pushed up the foreign exchange reserves to $142.637 billion powered by a $2.037 billion inflow. These inflows have now dispelled possibilities of any reversal in the market stabilisation scheme of the RBI, as demanded by the bankers last month.

Unlike the past interventions when investments in dollar securities resulted in negative spreads, though on a weighted average basis, the RBI had still managed to earn positive spreads.

No impact: This pattern of investments has also resulted in India being relatively unaffected by the hike in US interest rates, bankers said. This was because most of India's holdings were in the form of treasury bills or just interest earning cash balances. In the case of China and Japan, large holdings of their international investments were in the form of US government securities, medium and long term. This meant that they would be bearing the brunt of depreciation in their respective investments.

Credit offtake is expected to accelerate further with incremental credit-deposit ratios at close to 100 per cent. Some banks have braced themselves for more fftake by hiking deposit rates.

More banks could follow suit, though it was unlikely to translate into investments, given the already high investment-deposit ratios.

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