The Hindu Business Line : Bonds wobbly on rising oil prices, RBI moves

Bangalore, Nov. 11 Bonds were wobbly last week as nervous traders remained glued to galloping global oil prices and the Reserve Bank of India’s moves to keep liquidity on leash.

Traders said with more American financial institutions heading for large write-downs, FII net flows were a negative $351 million as more exited for bail-outs back home.

Despite the negative inflow, the RBI raised the ceiling on the market stabilisation scheme to Rs 2.5 lakh crore for the fiscal year. Traders said that one major reason for the hike was the concern that FII capital inflows were now being substituted by NRI inflows.

NRI inflows were largely on account of worries over dollar depreciation and also to take advantage of domestic yields and the exchange rate differential.

Interest rates

Interest rates for FCNR deposits are down to 3.8-89 per cent for two-year dollar denominated deposits. For NRI rupee- denominated deposits, rates were down by at least 15 basis points or about 4.45 per cent for two-year deposits as against 8.85 per cent for domestic depositors.

Yet time deposits have grown by Rs 24,055 crore for the latest reporting fortnight (October 26). On a year-on-year basis, time deposits have grown by Rs 5.38 lakh crore, recording a 28 per cent growth. Buoyed by NRI inflows, the rupee continued to remain firm, ending the week at 39.34 per dollar.

However, import demand, particularly from oil refiners and importers, pushed up the forward premia across all tenures.

Reverse repurchase

At the weekend liquidity adjustment facility auctions, recourse to the reverse repurchase window reduced to just Rs 2,030 crore from just 4 bidders, as oil refiners drew on their credit lines.

The low recourse was also partly due to the twin auctions for Rs 8,000 crore in the form of reissue of the 8.20 per cent 2022 and the 8.33 per cent 2036 paper. Both these papers were placed at yield to maturities (YTM) of 8.26 and 8.39 per cent respectively.

Traders said the bids were largely from insurance companies.

Cut-off yield

At the weekly treasury bill auctions, the tightening trend was evident. The cut-off yield was 7.31 per cent, and only Rs 500 crore of the competitive bids of Rs 7,154 crore was accepted, against the notified amount of Rs 3,500 crore. Most of the rejected bids were well over the cut-off yields. Besides, the weighted yield of the 91-day bill aligned with the cut-off yield at 7.31 per cent. Conventionally weighted yields have remained well below the cut-off yields. The alignment, traders said, implied that short term liquidity was likely to remain tight in the coming weeks. Only at the 364 day T-bill auctions, the notified amount of Rs 3,000 crore was realised at a yield of 7.76 per cent.

Average daily trade volumes were barely Rs 2,700 crore during the week. Besides, bid-offer spreads remained wide at the long end, at around 20 basis points, implying low interest for long dated securities. With NRI deposits pouring in, banks were able to earn a spread of at least 150-200 basis points even after netting for CRR, by parking the funds in the reverse repo window of the RBI. This was one of the key elements ensuring that the incremental investment deposit ratio was 31 per cent, well above the RBI’s statutory liquidity ratio of 25 per cent.

Some measures for correcting this arbitrage window therefore could be in the making, traders said. Both the instruments to contain money supply growth- CRR and MSS - could see further hikes if money supply momentum remained at current levels.

M3 growth

M3, the broad money supply measure, was growing at 22.5 per cent till October 26, well above the targeted 17 per cent. With FII flows slowing down and the new CRR hike becoming effective from this week, M3 growth is now likely to come under control.

But one-year real yields, currently upwards of 4.5 per cent, are still high. This could, however, shrink once the Government pushes up petroleum prices. But lending rate increases are clearly not on the horizon. This was because credit off-take was just beginning to pick up.

Credit growth is at 23 per cent, well below the deposit growth of 26 per cent.

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