The Hindu Business Line : Oil cos begin selling bonds

The oil bonds sales have pushed up the spread between the bonds and Government securities close to 100 basis points. The spreads remained high, notwithstanding the oil bonds sovereign guaranteed status. Oil bonds are securities issued to the petroleum marketing companies in lieu of subsidy payments from the government and are intended to partly offset refinery under recoveries.

Bankers said the high spreads were on account of low interest in oil bonds, or for that matter fertiliser bonds or even bonds issued to the Food Corporation of India. The low interest was largely attributed to the bonds being ineligible for maintenance of the Statutory Liquidity Ratio (SLR).

Surfeit of investments

Besides, the bankers said, there was a surfeit of investments with them. Currently, the outstanding investments with the banking sector in Government securities are about Rs 9.63 lakh crore. This translated into an investment-deposit ratio of about 33 per cent. This was well above the statutorily prescribed SLR of 25 per cent that banks are expected to maintain against their deposits.

The sale of the bonds by the oil companies were mainly for purchasing foreign exchange requirements to meet payment obligations which have mounted during the last few months after the spike in international oil prices. Currently, the global prices are in excess of $100 a barrel.

Bankers said that more oil bonds were expected to be floated soon, on account of the government’s resistance to hiking petroleum prices substantially to compensate refineries. Outstanding oil bonds currently amount to about Rs 62,000 crore. This year, so far about Rs 11,953 crore have been placed, according to the revised budgetary estimates.

With the increasing underrecoveries, oil companies have sought SLR status for the bonds. None of the special securities issued against subsidy payments are likely to be given SLR status, the bankers said.

Illiquid papers

Oil companies’ demand for SLR status was partly driven by illiquidity concerns. The illiquidity in turns leads to a premium that translated into a spread over the sovereign securities of identical maturities. The premiums tend to rise in situations when markets become tight, particularly when the refineries begin sourcing large volumes of foreign currency. The rising illiquidity premia in turn has escalated the costs of raising resources for oil companies.

During the last few weeks, a tight liquidity, refinery dollar purchases and a deceleration in capital inflows in the country had led to a severe shortage of dollars. The shortage had prompted exporters to take forward cover, driving forward rupee-dollar exchange rate into a discount. Bankers said that this situation was likely to continue for some more time as the exporters cancel and rebook their forward receivables, to capitalise on the rupee’s fall against the dollar.

Bankers said that liquidity was likely to remain tight in the coming weeks, in view of the advance tax payments. This in turn was likely to keep the illiquidity premia on the oil bonds at the current levels, they said.

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