The Hindu Business Line : Bonds firm on FII profit-taking, drawdown on credit by refiners

Bangalore, Dec. 16 Bonds firmed marginally last week in thin and listless trading on year-end profit-taking by foreign institutional investors and drawdown on credit lines by refiners.

Traders said that the 0.25 per cent cut in the Federal Funds rate to 4.25 per cent also triggered banking flows into the country particularly from non-resident depositors. This resulted in the rupee resuming its ascent against the dollar to Rs 39.35, triggering interventions from the Reserve Bank of India.

But liquidity remained slightly tight. Traders said that the RBI interventions were through the buy-sell swaps. This implied that the RBI bought dollars and simultaneously sold dollars for one-month forward. The swap route is preferred in view of the minimal liquidity impact, as opposed to outright interventions. Traders said substantial part of the NRI inflows were intended for subscription to a slew of equity floats expected during the current financial year, including that of State Bank of India. Consequently, refiners’ presence in purchases of foreign exchange from the spot markets had little impact on the rupee’s appreciation. Refiners were large buyers after selling some of their holdings of oil bonds and drawing down their credit lines from the banks.

But the NRI presence in the markets has begun showing up in interest differentials impacting forward premia, traders said, a trend normally witnessed only in the international markets. Forward premia as a result remained firm. One month was 1.75 per cent, three months was 1.73 per cent, 6 months was 1.88 and 12 months was 1.40 per cent.

But the drawdown by refiners had more banks accessing the repurchase window of the RBI at the weekend liquidity adjustment facility auctions. At the weekend LAF auctions, about 10 banks took recourse to the repo window for Rs 6,015 crore.

However, at the weekly Treasury bill auction, yields softened. At the 91-day T-bill auction, the cut-off yields moved down to 7.44 per cent, down from last week’s level of 7.52 per cent. The weighted yield remained in level with the cut-off yield. But the notified amount last week was just Rs 500 crore, though the RBI mopped up Rs 2,300 crore, including non-competitive bids from insurance companies and mutual funds. At the 182-day T-bill auctions, the cut-off yield was 7.60 per cent. Traders said the paring of the market stabilisation schemes in the auctions was largely in anticipation of some tightening in the markets.

This became evident at the auction of dated securities 7.99 per cent 2017 for Rs 5,000 crore and the 8.33 per cent 2036, where the cut-off yields to maturity (YTM) were 7.92 per cent and 8.26 per cent respectively. The ten-year YTM firmed to 7.91 per cent on a weighted average basis last week, up from the previous week’s 7.88 per cent.

The undertone was weak and was evident from the drop in average daily trade volume. Average daily trade volume was just Rs 4,200 crore. Besides, some banks also attempted to book profits by selling off some investments to beef up their bottom lines ahead of the third quarter. But most major banks preferred to increase investments, faced with accretion of deposits, mostly short-term and the continuing low credit off-take. Investment-deposit ratio for the first eight months of the current financial year was 50 per cent, implying that the investment chase was continuing.

The yield differentials between 91 day and 10 years, as a result, thinned to 45 basis points. The yield spread between one year and 29 years was just 56 basis points, implying an almost flat yield curve.

The preference for investments also resulted in pulling down the real yields slightly. One-year real yield was down 55 basis points last week to 3.95 per cent for the first time in about six weeks. Part of this trend was on account of advancing inflation that was reported at 3.75 per cent. But even at this level, real yields were more than double internationally accepted levels.

But bankers said that if the credit slowdown and liquidity inflows continued, the overhang would return to haunt the markets in the next few weeks as well. In fact, many of the banks are already speculating another hike in the cash reserve ratio from the current level of 7.5 per cent. The speculation also stemmed from the current high money supply growth of 23 per cent on a year-on-year basis. The growth was largely on account of an increase in the deposits with banks, that has grown by at least 25 per cent and foreign reserves that have grown 35 per cent.

As a result, banks are now putting pressure to begin redeeming some of their bulk deposits by reducing rates. Banks like the SBI have already reduced deposits at the short-end last week. More banks are likely to follow in the coming weeks in cutting deposit rates, both for domestic and non-resident depositors. The deposit chase is now over, at least for the time being.