The Hindu Business Line : State Govt papers back in favour

Few traders expect any major hardening of yields in the short run, partly on account of the pace of current and non-debt capital account inflows taking place in the market.

BONDS remained steady last week with surging inflows and mounting credit demand. Traders said that the Reserve Bank of India continued to intervene aggressively in a bid to soak up liquidity.

Besides, some oil companies were also in the market to capitalise on the current low prices and attempted to lock in on some forward contracts.Oil companies also took some forwards anticipating another spike in prices in the coming weeks.

Yet this demand failed to soak up the liquidity in the markets, evident from the large mop-up through the weekend reverse repos.

At the three-day reverse repos, the RBI mopped up close to Rs 31,000 crore.

Moreover, during the week, the State Government loans issue was oversubscribed, which has not occurred for more than a year-and-half.

The loan was oversubscribed by 200 per cent.

Against the targeted amount of Rs 2,900 crore, the RBI received subscriptions for nearly Rs 9,000 crore.

Almost the entire amount was mopped up by Life Insurance Corporation, which has enormous appetite for long duration papers.

Softening trend: Even after this mop-up, the yields on T-bill auctions continued their softening trend.

At the 91-day T-bill auction, the cut-off and the weighted average yield dropped to 5.11 per cent, from 5.16 per cent, which is very close to the reverse repo rate of 5 per cent.

Against a notified amount of Rs 4,000 crore, the bids received were close to Rs 8,000 crore.

Similarly, in the case of the 364-day T-bill auction, the yields dropped to 5.59 per cent, from 5.61 per cent.

But, few traders anticipate any softening in the market despite the trend at the T-bill auctions.

The 10-year yield to maturity (YTM) held steady at 7.10 per cent last week against previous week's 7.09 per cent.

Volumes rise: Trading volumes picked up during the week, with daily average volumes of Rs 2,500 crore. In the previous week, volumes were less than Rs 2,000 crore.

But, few traders anticipate any major upbeat outlook. Traders said the rise in volumes was on account of insurers' presence.

Insurers had exited from some equity holdings and moved back to government securities anticipating a short-term correction in the equity markets, traders said.

Yields were likely to follow the same pattern in the coming weeks as well, evident from the steady spreads between one year and 23 years.

This spread was 172 basis points last week, unchanged from the previous week.

However, some correction in the real yields took place on account of the slight rise in the inflation rate. Inflation for the week ended September 3 was at 3.16 per cent, implying a one-year real yield of 2.4 per cent, a six basis points drop from the previous week in line with international trends.

Few traders expect any major hardening of yields in the short run, partly on account of the pace of current and non-debt capital account inflows taking place in the market.

Last week, there was a drop of $278 million in forex reserves, entirely on account of oil companies' purchases.

More liquidity: Traders said that if the current pace of inflows continued, the markets could witness more liquidity.

The only correction that is expected could be after the meeting of the US Federal Reserve.

Traders said that if there were a further hike in Fed funds rates, there would likely be some flight from the domestic markets into the US, especially from the hedge funds.

However, there was little evidence to support that the flight was likely to be large, apparent from the soft forward premia.

Forward premium between one month and 12 months ranged between 0.4 per cent and 0.6 per cent, clearly implying that foreign exchange inflows were likely to continue.

Credit demand: One major factor that could force a change in the situation is credit offtake.

Nominal credit-deposit (CD) ratio was 66 per cent, whereas the incremental CD ratio continued to be close to 100 per cent.

Bankers said that if the offtake continued at this pace, they would be left with few alternatives other than hiking the deposit rates.

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

Stories in this Section
Bank aid for housing scheme at Thrissur

Payouts during calamities: Fact & fiction

GIC, a leader in reinsurance

New players steer non-life sector

GIC to upgrade offices in London, Dubai

Bharat Overseas IPO soon

Union Bank Tier-II bond issue gets good response

State Govt papers back in favour

BoI to raise $350 m via medium term notes

Metro Co-op Bank licence cancelled