The Hindu Business Line : Rate hike spectre hangs over bond markets

Bankers said that oil companies were active in the foreign exchange markets to meet their crude oil import payments. But, few were taking forward cover. Instead, most of the foreign currency requirements were sourced from the spot markets, they added. Oil companies were renewing some of their credit lines with the banks. These credit lines were used to source their foreign currency requirements; thereby, drawing out liquidity. Some of the oil companies have, in fact, reworked their credit lines with high oil prices.

However, the major worry for banks is the bottom line impact in a higher interest rate regime. Bankers have begun feeling queasy over slipping bottom lines in the first quarter results. Besides, their plans to tap the equity markets with follow-on issues are in jeopardy. With equity markets sinking, cost of tier-one hybrid capital (preference shares/ perpetual bonds) and tier-two subordinated debt have also soared. The last few issues were made at rates close to nine per cent.

T-bill yields

Bankers' worries were reinforced after the Treasury bill auctions results were announced. The cut off yields on the 91-day T-bill jumped to 6.19 per cent, up from 5.75 per cent the previous week. The 182 T-bill yields also moved up to 6.50 per cent. But the ten-year YTM remained stable. Last week the ten-year YTM was 7.83 per cent on a weighted average basis, as against the previous week's 7.84 per cent.

Yet this teeny retreat in yields was hardly any comfort. Some banks conceded that they would incur net losses in Q1 as more of them shift their portfolios to the Held-to-Maturity. Shifting from marked-to-market to Held- to-Maturity would imply that they would have to amortise valuation differences and incur losses.

Real yields moved up to over two per cent, indicating that bankers' fears were far from over. The high voltages in securities dealing rooms have dipped and daily trade volumes were barely Rs 300 crore. There are simply no buyers. Even Life Insurance companies that are normally active buyers were noticeably low profile.

FIIs exodus

Taders said that insurers including state owned companies were attempting to support the equity markets in the awake of an FII exodus. Yet their interventions were low octane. This was because FII exodus was expected to continue, ahead of a hike in US interest rates. The Fed Funds (the interest rate that banks charge each other for the use of Fed funds) is expected to rise by at least 25 basis points from the current level of five per cent.

Along with the insurers, bankers were also on the backfoot. This was evident from rising cash balances with the Reserve Bank of India. In fact, at the three-day liquidity adjustment facility auctions, the mop-ups through three-day reverse repurchase operations were Rs 40,565 crore. On the face of it, it may appear that there is ample liquidity in the banking systems.

But, bankers admitted, the liquidity was created only by choking off other exit points. Incremental credit-deposit ratios of banks have drastically shrunk. The 100 per cent plus days of incremental credit growth have disappeared. In fact, for the last week, the incremental credit-deposit ratio was just 43 per cent. Bankers are holding more cash. Incremental cash deposit ratios are 20 per cent. This is way above the prescribed cash reserve ratio of five per cent. However, this component also included the reverse repo mop-ups.

Credit-Off Take

Yet bankers said such a strategy offered a good spreads, on their short-term accretions. Most of their deposit accretions were at the short-end. These included savings deposits that carried interest of 3.5 per cent and short-term deposits, of up to 46 days that carried interest rates less than 4.25 per cent. Consequently with reverse repo rates at 5.75 per cent, bankers said the spread was sufficient to ensure their profitability till the peak season credit-off take begins. The credit-off take is expected to show big increases and deposit rates are likely to be pushed beginning next month onwards. Till then they would prefer to be cash heavy.