The Hindu Business Line : Bonds reverse trend; FII exit has little effect on forward premia

Traders said that foreign institutional investors (FII) largely remained sellers through the week. In August, so far, FIIs have sold the equivalent of Rs 50,000 crore of equities for bailing out their sub-prime exposures back home. As a result, FIIs have been actively buying dollars.

But exit by FIIs had little effect on forward premia though spot exchange rate dropped to Rs 41.18. Forward premia actually firmed during the week.

One-month forward almost levelled at 0.2 per cent. Premia for 3, 6 and 12 months were below 1.25 per cent. The fall in premia was on account of exporters taking forward cover, as the rupee depreciated against the dollar and large accretions to non-resident deposit accounts of banks. Besides, oil companies abstained from taking forward cover.

Besides, deposit growth was accelerating powered by frenetic resource mop-up efforts. Deposits have grown at around 25 per cent. In addition, there were also large coupon flows of Rs 11,000 crore. This led to banks taking recourse to the reverse repo window at the three-day Liquidity Adjustment Facility auction. The mop-up at the weekend auction was Rs 12,035 crore.

During the week, another Rs 7,000 crore was also raised by way of dated securities as part of the government borrowing programme. The 7.27 per cent 2013 was priced at 7.87 per cent and the 7.99 per cent 2017 was priced at 7.91 per cent respectively at the auction.

But for this auction, traders said, the recourse to the reverse repo window would have been higher. This time the securities were almost entirely lifted by primary dealers and banks. Banks preference for these two securities was in view of their liquidity. Primary dealers hope to unload the securities to the mutual and provident funds.

However, at last week’s 91-day Treasury Bill auction, the cut-off yield firmed to 6.81 per cent, up from 6.73 per cent the previous week. The weighted yield firmed to 6.77 per cent from 6.65 per cent.

Although the combined bids, competitive and non-competitive, were well above the notified amount of Rs 2,000 crore, the spread between cut-off and weighted yields shrank to 4 basis points.

Clearly this indicated that yield expectations were on the ascent. Similarly, the yield on the 182-day T-bill yield rose to 7.47 per cent.

The firm short-term yields notwithstanding, the ten-year YTM softened to 7.93 per cent on a weighted average basis last week, down from the previous week’s 7.98 per cent.

The undertone was weak. Daily trade volumes were down to Rs 5,000 crore. Bid-offer spreads also remained wide, anywhere between 15 and 20 basis points. Yield spreads narrowed indicating a flat curve. The spread between one and 29 years was down to 80 basis points.

The reason for the narrow yield spread was partly due to intervention by life insurance companies, particularly the Life Insurance Corporation. LIC has been active reshuffling its debt securities, through switches. Besides, banks have been moving into short-term securities, for maintaining Statutory Liquidity Ratio (SLR), in view of the maturing T-Bills.

The outlook appeared bearish. ING Vysya Bank’s Chief Economist, Mr Harish Menon, said, “We will see tightening of liquidity, as the peak season begins.”

And the signs were all there. Beginning with the repo auctions, there were only 7 bidders implying that liquidity was concentrated with just a handful of banks. The other sign was rising incremental cash-deposit ratios. Incremental cash- deposit ratio is currently about 70 per cent.

Moreover, September is also the month for advance tax payments. And the sub-prime chiller is far from over. This was evident from put-call ratios indicating that there were more surprises. The Nifty put-call ratios were still in 1.2 times.

The flip side or the only one was that one-year real yield is 3.55 basis points or more than double internationally acceptable levels.

All these events come just as credit off-take season is about to begin. As a result, bankers are now quietly backing off from cutting back retail deposit rates.

This is especially since no changes are expected from the banking regulator till the peak season credit policy.

Related Stories:
Forward premia drops on Fed move to check sub-prime crisis

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