The Hindu Business Line : Insurers stay away from bond markets

Traders said oil companies were present in the market expecting a rise in oil prices in the coming weeks due to unrest in Nigeria and the standoff between the US and Iran.

As a result, oil companies had increased the purchases of oil for stockpiling reserves to hedge against further price spikes and potential disruption in supplies.

Oil prices were about $63 a barrel, which pushed up the weighted average import prices for domestic importers to about $57-58. Such high import prices and low realisation have sharply shrunk the margins of the companies, making them among the largest borrowers in the markets, traders said. The purchases and forward cover by the companies ensured that forward premium for up to three months were at 3 per cent.

Forex inflows

The rise would have been far sharper, but for the large foreign exchange inflows, mostly on the non-debt capital and current account. Inflows were upwards of about $100 million per day. Despite these inflows, the reserve money expansion was not sufficient to meet the liquidity requirements, especially at the current international oil prices.

Tight liquidity

As a result, liquidity remained tight, evident from the high recourse to the repo window by the banks. At the weekend reverse repo auction, banks' recourse to this window was to the extent of Rs 8,000 crore as some of the banks took advantage of the conversion of the recap bonds into tradable securities.

The liquidity demand was evident from the trend in the Treasury bill auctions. The weighted average yield, which had remained below the cut-off yields, converged at 6.65 per cent, indicating a further tightening could be under way.

T-Bill yields

The cut-off yield on the 91-day T-Bill was the same as the previous week, though the weighted yield was higher. In the case of the 182-day T-Bill auctions, the weighted average yield was 6.72 per cent, though the weighted yields were three basis points lower.

The tight liquidity ensured that the 10-year yield to maturity on a weighted average basis remained high at 7.38 per cent, down slightly from the previous week's 7.39. The undertone, however, remained weak.

Few buyers

Last week, there were few buyers for securities. In fact, sellers outnumbered buyers. Insurance companies which are largest buyers, preferred to stay away from the markets, expecting yields to harden further in the coming weeks.

As a result, volumes remained low at barely Rs 650 crore per day.

One reason for this was theyear-end window dressing, as bankers attempt to beef up their bottomlines to improve their return on assets.

Currently, for most banks, the yield on assets was low, partly on account of government securities and corporate credit.

Therefore, most bankers were attempting to remove low-coupon securities and move to the shorter end of the bond markets over fear that depreciation would pull down profits.

This prompted insurers to stay away, anticipating better bargains, in terms of better YTMs.

Hardening real yield

Reflecting this expectation was the hardening real yield for one year. At three per cent, this is at the highest level in two years portending a further hardening of yields.

This expectation was also driven by the high non-food credit demand.

Last week, credit offtake was about Rs 34,478 crore, the highest since the beginning of this year.

Demand was mostly from farm credit, as more bankers were plugging for it in view of the high rates.

The average yield on farm credit is close to 11.5 per cent, making it an attractive asset in the bankers' books.

Credit drive

The credit drive pushed up the nominal credit-deposit (CD) ratio to 71 per cent and the incremental CD to over 100 per cent.

Bankers said that as the deposit inflows begin, convergence of incremental and nominal credit would take place.

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