The Hindu Business Line : Bonds pause, await Policy cues; slowdown, inflation fears loom

Traders said with the annual inflation at 7.33 per cent there was increasing speculation of strong medicine from the Reserve Bank of India (RBI). Traders, as a result, remained circumspect, preferring to wait for the announcement before building up positions.

Besides, the Federal Open Market Committee was also expected to meet on the same day. Fed funds rates, the rates at which US banks borrow reserve funds from each other, are expected to see a 25 basis points drop from the current level of 2.25 per cent. The stop-out rate, or the spread at which the Fed lent Treasury securities against eligible mortgage-backed and asset- backed securities, was 25 basis points at the week-end auctions.

High oil prices

Another major worry of the markets was high global oil prices. The high price at $119 a barrel translated into import parity price of close to $114 a barrel. The high price pushed up refining companies’ demand for the dollar.

Besides, inflows of dollar were thin. Inflows from the FIIs also remained low ahead of the FOMC meeting. This month so far, the FII flows were negative by $130, according to data from the Securities and Exchange Board of India. Moreover, short-term flows also appeared to have abated as a result of the firm premia. This removed the overnight cross border arbitrage options. Spot rupee-dollar exchange rate went down to Rs 40.18.

Forward premia

Overnight forward premia was a little over 4 per cent, implying that there was little room for taking advantage of interest differentials. But forward premia in other tenors revealed a divergent trend. Traders said that corporates prepared for making large pre-payments anticipating a further dollar softening. As a result, forward premia, barring the month tenure, firmed. Forward premia for one, three and 12 months widened. Six months premium softened due to anticipated inflows from exporters. Premia for one, 3, 6, and 12 months were 0.60 per cent (0.75 per cent), 2.29 per cent (2.10 per cent), 2.19 per cent (2.30 per cent) and 1.89 per cent (1.70 per cent).

The outflows had little impact on liquidity. Liquidity in the banking system remained surfeit. This was evident from the weekend liquidity adjustment facility auctions. At the LAF auctions, the mop-up through reverse repurchase auctions was Rs 32,765 crore. At the weekly Treasury bill auctions, the cut-off yield on the 91-day T-bill was set at 7.44 per cent, though the weighted average yield was 4 basis points lower. The cut-off yield was at the same level as last week in view of the large bids from competitive bidders. Competitive bids were for Rs 6,747 crore as against a notified amount of Rs 2,500 crore. In addition, there was a lone non-competitive bid of Rs 500 crore, that took the mop up to Rs 3,000 crore. At the 364 day T-Bill auction, the cut-off yield was set at 7.69 per cent.

The liquidity overhang notwithstanding, the Government auctions of dated securities saw higher cut-off yields. The new 10-year security yield to maturity (YTM) was set at 8.24 per cent and the weighted average YTM at 8.22 per cent. The 8.33 per cent 2036 per cent security was placed at YTM of 8.77 per cent.

Despite the high cut-off on the 10-year security, the weighted average 10-year YTM ended the week at 8.15 per cent, well above the previous week’s 8.08 per cent. This implied that many of the primary dealers booked large profits ahead of the Credit Policy announcement.

Trade volumes remained low during the week though, they were higher than the previous week’s average of about Rs 4,200 crore. The pick-up in trade volume was largely on account of an anticipated correction and the low credit off- take.

Credit-deposit ratio off-take, since the beginning of this financial year, was a negative 169 per cent. This implied that the banks had more deposits with them than loan assets. As a result, the outlook for bonds was positive. The positive outlook brought insurance companies back into the market. Insurers picked up the 8.33 per cent 2036 security at 8.61 per cent, or about 16 basis points below the YTM at the auction.

Bankers said that the positive outlook was partly driven by anticipation of stiff inflation control measures by the RBI at the credit policy announcement. However, few expected hikes in the reverse repo and repo rates. “Hikes are likely to push up rates, and no one is in favour of that situation when off-take is low,” a top banker said.

The inflation control then narrows down to selective credit controls. Such controls are likely to favour bonds. Among the options for such credit control include hikes in interest rates, or increase in margins or raising the credit risk weightages for commodity trade financing. The objective, bankers said, was to raise the carrying cost for the traders. The resultant impact would push out inventories into markets, slamming the brakes on inflation.

Investment-deposit ratios are likely to move up in the process. Nominal investment-deposit ratio is currently about 32 per cent. Such moves though are likely to suppress deposit rates, as banks shift focus to containing high liabilities.

More Stories on : Govt Bonds | Economy | Credit Policy

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

Stories in this Section
Polaris eyes tier-II banks to expand product reach

State Bank of Mysore to beef up presence in TN

KASSIA seeks reduction in interest rates

Bonds pause, await Policy cues; slowdown, inflation fears loom

IBA, unions wage talks to begin on May 5

Seminar on financial services

Bank of India to focus on qualitative growth