The Hindu Business Line : States park Central funds in short-term gilts

Banking sources said that States have begun investing the resources in view of the low off-take, by their respective departmental undertakings, of plan allocations. The bankers said that Southern and Western States were among those making such investments for maximising returns, instead of parking them in bank deposits.

In fact, this was one of the major factors that drove down yields during last week, despite the reduction in banks' recourse to the reverse repurchase window of the Reserve Bank. The reverse repurchase window is where bankers park liquidity in exchange for securities ranging from one to three days during weekends.

At last week-end's reverse repo auction, the RBI mopped up only Rs 30,990 crore down from the previous week's Rs 48,355 crore.

Bankers said that with the States participating in the Treasury bill auctions, as non-competitive bidders, cut-off yields on the 91 day T-bills dropped to 6.36 per cent, down from 6.44 per cent.

The trend in non-competitive participants was also evident from the weighted average yields. Till early this month, the weighted average yields have remained levelled with the cut-off yields. But since last week, the weighted average yields have dropped below the cut-off yields, indicative of the intense competition. In fact, bankers said, this participation also allowed the market stabilisation scheme component to be fully subscribed.

States have also begun parking resources in dated securities as well driving down the 10-year yield to maturity. The 10-year YTM as measured by the benchmark 7.59 per cent 2016 was 8.14 per cent. In July this year, the average YTM of this security was 8.28 per cent.

This, however, is not the first time that States are parking funds in Central Government securities. In fact, in the past they had invested in gilts and T-bills as part of treasury management. The trend is largely influenced by returns. Bankers said that bank deposits currently generated returns of barely less than six per cent for the States. By investing in T-bills, they get three to four per cent higher returns, bankers said.

Along with the States, even some of the public sector undertakings (PSU) are resorting to proactive treasury management, bankers said. However, in the case of the Central PSUs, the preferred investment options are either bulk deposits or certificates of deposits. However, many of the PSUs have now become wary of CDs. Instead, the preference was only for bulk deposits, where they were parked for tenures of up to 90 days and rolled over subsequently if necessary, the bankers added.

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