The Hindu Business Line : Bonds remain listless as fears of CRR hike loom

Traders said that although inflation numbers were positive, one of the major worries was the sudden liquidity influx almost entirely out of reserve money accretions, in particular from debt and non-debt capital account. The debt component was mainly corporates resorting to cross border resource-raising taking advantage of low interest rates.

The non-debt component was mainly through NRI flows for subscribing to the initial public offerings (IPOs).

These flows and anticipated flows pushed the forward premia down to a range between one and 2.5 per cent for one month to 12 months.

Besides, in anticipation of these flows many of oil companies and corporates have stopped taking forward cover expecting the forwards to sink further in the coming weeks. This was despite high international oil prices of $65 a barrel. The resultant impact on liquidity was evident from the large bids at the weekend liquidity adjustment facility (LAF) auctions. The bids at both the weekend LAF auctions amounted to about Rs 1.02 lakh crore.

The bids accepted though were only Rs 2,949 crore, about 2.8 per cent of the bids. These bids were taking place, despite the heavy mop-up through a combined issue of Rs 6,500 crore of Treasury bills and Rs 9,000 crore of dated securities.

The large bids were despite the aggressive mop-ups through T-Bill and dated securities placements. At the beginning of the week, the RBI placed the 7.49 per cent 2017 paper and the 8.33 2036 paper.

Both these papers were placed at yield to maturities (YTM) of 8.17 per cent and 8.52 per cent respectively. Life insurers mostly picked up the papers. In addition, another Rs 5,000 crore was removed under the Market Stabilisation Scheme, through placement of 6.65 per cent 2009 paper at an YTM of 7.96 per cent.

However, at the 91-day Treasury bill auction, the yields sank to 7.23 per cent last week, down from the previous week and the weighted average yield dropped to 7.14 per cent, 13 basis points down from the previous week. But the actual mop-up in the 91-day T-bill was Rs 9,493 crore, as against a notified amount of Rs 3,500 crore.

The large non-competitive bid of Rs 5,994 crore was accepted. The pressure was less in the case of 364 day T-bill auction. The cut-off yield was 7.69 per cent and the weighted yield was 7.65 per cent. As against the notified amount of Rs 3,000 crore, the actual amount picked up was Rs 3,118 crore.

In fact, this is a trend that is expected to continue for some time as part of the sterilisation exercise is expected to continue on similar lines with stepped up amounts at the Treasury bill auctions. For the week also, the RBI has notified an amount of Rs 3,500 crore for the 91-day T-bill auction and Rs 2,500 for the 182-day T-Bill auctions.

Yet despite this large liquidity, the 10-year YTM firmed to 8.16 per cent on a weighted average basis, up from the previous week's 8.14 per cent. Traders said that this was largely because most of them expected interventions from the RBI to dam the liquidity flows.

Among the moves anticipated is a tweak to the CRR, a hike ranging from 25-50 basis points.

But another option before the RBI, traders said, was to increase the band between the repo and the reverse repo rate, by dropping the latter, and curbing arbitrage opportunities.

In reality, however, the arbitrage opportunity through the reverse repo is limited to only Rs 3,000 crore, and this ceiling, traders said was unlikely to be touched.

The undertone was weak. This was evident from the drop in daily trade volumes to barely Rs 650 crore.

The outlook also remained weak. This was evident from the narrowing yield spreads. The spread between one year and 29 years was just 55 basis points.

The reason was that not many banks were willing to either buy or sell, as traders remained wary of an RBI intervention.

This was despite the positive inflation numbers. Inflation was 4.85 per cent giving a one-year real yield of over 3 per cent. Clearly the indications are that there could be a yield softening in the coming weeks.

The signs of this softening are already there. The nominal G-Sec investment deposit ratio was 31 per cent. However, the incremental ratio was 98 per cent. Most of the G-Sec investments were only into short dated securities and Treasury bills.

Bankers said that they would prefer to keep their investment portfolios derisked and insulated from possible depreciation when credit picks up in another two months at the beginning of the peak season.

Credit off-take slow

Credit off-take has slowed down considerably while the incremental credit deposit ratio was less than one per cent. But this is a seasonal factor, bankers said. Average yield on assets was now less than 9 per cent for most of the banks. Shrinking yields though could translate into thin bottom lines.