The Hindu Business Line : Bonds remain range-bound on RBI intervention

Bangalore, Oct. 14 Bonds remained ranged as the Reserve Bank of India aggressively intervened to mop-up surging liquidity.Bankers said soaring oil prices had little impact on liquidity. Oil companies scrambled for cover and drew on their lines of credit from the banks, for meeting their import payment obligations.

Despite demand from oil companies for the dollar, the rupee gained to 39.37 and headed close to the decade’s highest level.

The flows were largely driven by hedge funds, operating through foreign institutional investors. Last week alone witnessed a little over $2 billion of net flows from hedge funds/FIIs.

Traders said that the RBI intervened to stem the rise of the rupee by way of buy-sell swaps, of up to a month. The result was that the rupee’s gains against the dollar was considerably moderated, but one-month forward premia softened to 0.53 per cent, down from the previous week’s 0.68 per cent.

But longer forwards moved up, as the central bank’s directives on repatriation of external commercial borrowings and liberalisation of capital account transactions kicked in. Forward premia for 3, 6 and 12 months rose to 1.42, 1.58 and 1.37 per cent respectively, up from the previous week’s levels of 1.01, 1.02 and 1.09 per cent.

LAF auctions

The impact of the interventions was evident from the weekly liquidity adjustment facility (LAF) auctions.

At the week-end LAF auctions, recourse to the reverse repurchase window was Rs 36,545 crore, the mop-up of close to Rs 23,000 crore through placement of securities. Of this, at least Rs 11,200 crore comprised market stabilisation scheme (MSS) securities. The liquidity pushed down the yield on the 91-day T-bill to 6.98 per cent, down from last week’s 7.14 per cent. Bids for the T-bills amounted to Rs 14,393 crore for a notified amount of Rs 3,500 crore. The actual retention from the 91-day bill auctions was Rs 4,700 crore, inclusive of the MSS component.

At the 364-day auction, the cut-off yield was 7.37 per cent. At the MSS securities auctions, both reissue securities — 5.87 per cent 2010 and 11.30 per cent 2010, the cut-off yields to maturity (YTM) were 7.78 and 7.82 per cent respectively.

However, the high liquidity in the system had little impact on yields of long-dated bonds. This was evident from the week’s auctions of the 25-year 7.95 2032 security and the 7.99 2017 for raising Rs 10,000 crore.

The yields on these two securities were 8.45 per cent and 7.91 per cent respectively. In fact, the ten-year YTM dropped to 7.94 per cent on a weighted average basis, though it was down from the previous week’s 7.97 per cent. Since the middle of last month, the weighted ten-year YTM has faced resistance at 7.89 per cent.

The State Bank of Mysore Chief General Manager, Mr Dilip Mavinkurve, said: “The flows are essentially short-term liquidity. Therefore, the impact on long tenure securities will be limited.”

Ranged movements indicate caution, evident from the low trade volumes at the CCIL’s electronic platform. Daily average volume was just around Rs 4,585 crore.

Besides, T-bills accounted for at least 40 per cent of the trade volumes. The remaining was mostly short dated securities. The low interest in long-term securities was apparent from high bid-offer spreads of close to 20 basis points at the long end and barely 5 basis points for securities with a residual maturity of under two years. Besides, insurance companies abstained anticipating hardening of yields in the coming weeks. As a result, the undertone remained weak.

Outlook bearish

The outlook for bonds was also bearish on account of fears of an inflationary resurgence due to large capital flows and high global oil prices. Consequently, bankers said that some more measures for stemming inflows, particularly ‘hot flows’ from hedge funds, were in the offing. Traders said that already some banks were tightening KYC (Know Your Customer) norms on funds from non-resident depositors. Similarly, tightening was also expected on participatory notes of FIIs to minimise the liquidity impact. Besides, bankers are now reconciled to another 25-50 basis points hike in the cash reserve ratio to ensure that money supply growth remained within the upper limit of 17 per cent.

Even a nominal inflation rate of 3.26 per cent, translating into a one-year real yield of 4.32 per cent, was unlikely to lead to any relaxation of policy rates, bankers said. Besides, not many banks or corporates are taking the one-year real yield at face value. This was because oil prices were yet to be passed on to product prices.

Redemption pressures

But the disinterest in bonds is also fuelled by redemption pressures on banks. Many of the banks are quietly redeeming bulk deposits and certificates of deposits, leaving them with surplus securities for meeting their statutory liquidity ratios.

In fact, the incremental investment-deposit ratio as a result hit a negative 0.1 per cent, implying more sales than purchases. Besides, fears of a credit slowdown appear to have abated for the moment as a pick-up appears to have begun with the beginning of the peak season. The incremental credit–deposit ratio was now about 100 per cent.

More Stories on : Govt Bonds | RBI & Other Central Banks

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Factoring services yet to gain popularity

Relevance of the World Bank

Two sides to the coin

IDFC net rises 27%

‘Bring all Andhra Bank branches under CBS’

Bonds remain range-bound on RBI intervention

‘Indian cos attracting investor confidence globally’

Disha centre opened in Chennai