The Hindu Business Line : Yields soften as pressure on liquidity eases

Traders said with banks becoming compliant with the new cash reserve ratio norms, the pressure on liquidity eased. This contributed to the softening of yields. CRR compliance and oil companies drawdown on credit lines were major factors that led to volatile money markets since the end of last year and the beginning of this year. What also contributed to the reversal of bond yields was the presence of life insurance companies, traders said.

With international oil prices down to $55 a barrel, oil companies reduced their credit line drawdown. At current international oil prices, the weighted average import price is currently about $51. Besides, liquidity influx into the markets was also on account of maturing of forward interventions in the foreign exchange markets by the RBI during last month. Bankers said redemption of market stabilisation scheme securities also pushed up the liquidity levels.

ACTIVE WINDOW

As a result at the three-day weekend liquidity adjustment facility auctions, it was the reverse repurchase window of the RBI that was active. Through the reverse repo window, the RBI mopped up Rs 5,310 crore. This liquidity influx reflected in the call markets that dipped below the reverse repo rate of 6 per cent.

The surfeit of liquidity also became apparent from the Treasury bill auctions during the week. The 91-day T-bill cut-off yield was fixed at 7.14 per cent whereas the weighted average yield was 8 basis points lower last week. The previous week the cut-off and the weighted yields were 7.19 per cent and 7.14 per cent respectively. As against the notified amount of Rs 2,000 crore (Rs 500 crore normal and Rs 1,500 crore as part of the MSS), the bids received were Rs 2,971 crore. The RBI retained the entire notified amount of Rs 2,000 crore. This was a departure over the last few weeks; the bids accepted were far less than the notified amounts. Similarly, the 364-day T-bill cut-off yield dipped to 7.19 per cent and the weighted yield to 7.17 per cent. As against the notified amount of Rs 2,000 crore, the bids made topped Rs 4,500 crore. The liquidity situation was also evident from the thin spreads between the 91 and the 364 day T-bills.

The 10-year yield to maturity, as a result, dropped to 7.57 per cent on a weighted average basis last week down from 7.61 per cent.

The undertone was firm last week as was evident from the improved trade volumes. Daily trade volumes were about Rs 1,500 crore. This was largely on account of the switches by the life insurance companies. Life insurers switched their portfolios to ensure that the average maturity of fixed income securities was above 10 years. Insurers sold their short-dated securities at low yields (high prices) and purchased long dated securities at high yields (low prices). This in turn pushed the yield spreads. Yield spreads rose to 70 basis points last weekend. The previous weekend, the spreads had dropped to under 50 basis points.

Bankers said yields could move down further south in the coming weeks. This was evident from the sinking forward premia with exporters taking forward cover after a gap of almost a year. This was in view of the high premia across all maturities and in anticipation of a retreat. The retreat was becoming a real possibility in view of oil companies limiting their hedging, as oil prices fall and the rupee advancing against the dollar. One month forward premia, which had hit close to 9 per cent one week ago, was down to 4 per cent. Moreover, forward interventions of the RBI are expected mature in the coming weeks. The fundamentals also supported a softening of yields. One-year real yield was 1.75 per cent, way above the internationally accepted levels of one per cent.

Credit off-take

However, traders said that credit off-take would limit the southward momentum of yields. Incremental credit deposit ratio has once again moved above 100 per cent. But bankers said this was also due to redemption of bulk deposits. Deposit mobilisation has already gathered momentum and growth rates are now around 24 per cent industry wide after the tweaking of interest rates. Some banks are beginning to see a situation, where deposits are growing faster than credit. The flip side was government borrowing requirement and that could have a big impact on yields, they added.