The Hindu Business Line : Insurers’ support keeps bonds firm

Bangalore, Sept. 9 Bonds remained steady during the week as banks chased securities for meeting reserve ratio requirements. Traders said insurers, particularly the Life Insurance Corporation, supported bonds, picking up long-term securities. Markets were, however, haunted by sub-prime uncertainties and fears of rising international oil prices. With international oil prices firming to $77 a barrel, refineries were active hedging their import payment dues.

Premia hardens

Besides, capital goods importers/ECB debtors also hedged their payment dues. The resultant impact was that forward premia hardened. One-month forward premia was 1.18 per cent. Three, six and 12 months firmed to 1.23 per cent 1.28 per cent and 1.5 per cent respectively last week over the previous week. Yet, these outflows failed to impact yields. FII inflows from East Asia resumed. Besides, bankers said that liquidity accretions were also partly on account of Treasury bills and Government securities redemptions amounting to Rs 22,000 crore and Rs 30,000 crore respectively.

In addition, the banking sector was also likely to receive coupon flows amounting to Rs 15,000 crore during the next fortnight. Besides, short-term flows from foreign institutional investors poured into the market. These flows more than offset the impact of the government borrowings of Rs 7,000 crore through twin auctions of 8.20 per cent 2022 and 8.33 per cent 2036. The securities were lifted at yield to maturities (YTM) of 8.16 and 8.41 per cent respectively. With this round, government borrowings in the first half of the current year were Rs 97,000 crore. That the borrowing failed to soak up the liquidity was evident from the three-day week end liquidity adjustment facility auctions. The bids for the reverse repurchase auctions were Rs 35,090 crore.

But bankers said that the high response to the reverse repo window was also partly driven by high deposit inflows and corporate loan redemptions. The high liquidity also pushed down the yields at the weekly Treasury Bill auctions. The yield on the 91-day Treasury bill dropped to 7.06 per cent last week from 7.10 per cent. The weighted yield however, remained steady at 7.02 per cent. Bids at the 91-day T-bill auctions were Rs 7,985 crore for a notified amount of Rs 3,500 crore. Only the notified amount was accepted. Non-competitive bids were Rs 2,100 crore and were fully accepted. The cut-off yield for the182 day T-bill was 7.40 per cent. The rush for the T-bills was also largely on account of the bias in favour of short-term securities due to an anticipation of a liquidity tightening from the middle of this month, as advance tax payments start. As a result, the ten-year yield firmed to 7.96 per cent last week on a weighted average basis, up from the previous week’s 7.94 per cent.

Deposits surge

But the undertone was firm. Daily trade volume jumped to over Rs 8,400 crore. The improved trade interest was also evident from the thin bid offer spreads that dropped to under 10 basis points. Further, the yield spread between one-year and 29-years jumped to 83 basis points. Traders said that the firm trend was largely driven by surge in purchases by banks for meeting their statutory reserve ratio requirements. Public sector banks have seen a surge in deposits during the second quarter of the current financial year. Outstanding deposits currently are Rs 27.45 lakh crore or about 25 per cent more than corresponding period of the last financial year.

Bankers said that this surge was likely to continue, though at the shorter ends. The surge was also supported by the spate of initial public offerings, especially the public sector Power Grid Corporation of India.

Such short-term deposits were parked in the T-bills and reverse repos. Bankers said that the ten-year YTM were likely to remain ranged between 7.85 per cent and 7.95 per cent over the next two weeks. This was despite the retreat in inflation to 3.79 per cent.

At this level, the one-year real yield is currently 3.8 per cent or well above the internationally accepted level of 1.5 per cent. But bankers said that despite the retreat in inflation, nominal yields would remain at the current levels. This was partly on account of the large difference between the provisional numbers of the WPI-based inflation and the final numbers. At any point of time, the difference has remained about 40 to 50 basis points. Another reason for the scepticism was on account of the hardening oil prices. The prices have not yet been passed on to consumers. Only after these items are passed through, the effect of inflation would be known, bankers said.

Despite the inflation retreat, there is intense worry over the pace of credit offtake in the banking system. Bankers are reporting a slowdown in corporate credit offtake. In fact, most corporates have begun drawing down on their investments, for meeting their capital expenditure. Nominal credit deposit ratios, however, remain at 70.65 per cent. Incremental credit deposit ratios for the week ended August 17 have escalated 100 per cent. But bankers said this was largely on account of redemption of bulk deposits during the month. Most bulk deposits raised in March were parked for six-month durations.

The redemptions, along with the estimated outflow of Rs 50,000 crore, are expected to tighten conditions in the markets.

The tightening was coming on the eve of the peak season credit offtake. The fear is that tight conditions at this juncture would impact credit offtake, with potential impact on GDP growth rate.

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