The Hindu Business Line : Bankers brace for further increase in repo rates

Bangalore, July 3 Bankers are bracing for a further hike in the repurchase rate as liquidity remained tight with the exodus by foreign institutional investors (FII).

FIIs have remained as net sellers since the beginning of this financial year. According to data from Securities Exchange Board of India, FII net sales in the stock markets between April and July 2 were $ 4.7 billion.

The continued sales pulled the rupee-dollar exchange rate to 43.30 or a 8.3 per cent depreciation since the beginning of this financial year. Traders said that the continued dollar demand from financial institutions, non-oil importers and corporates with debt service obligations led to the liquidity tightening.

The tight liquidity was evident from the high cut-off and weighted yields at the weekly 91 day Treasury bill auctions. The cut-off and the weighted yields for the 91-day T-bill was 8.81 per cent and 8.73 per cent respectively.

These rates were at least 30 and 23 basis points over the new repurchase rate of 8.50 per cent.

The repurchase is the Reserve Bank of India’s short term liquidity support window to banks and primary dealers. The bankers said the high spreads between the repo window and the 91-day T-bill also created an arbitrage window for some of the market-savvy traders.

The window opened up in view of the difference between the RBI’s repurchase window at 8.50 per cent and parking the same in the 91 day T-bills. A hike in the repo rate would cut that the arbitrage opportunity, bankers said.

Oil bond purchases

The tight liquidity situation would have been worse, bankers said, but for the RBI’s special market operations (SMO) for supporting oil companies. The RBI was meeting the refineries’ liquidity requirements through purchase of oil bonds.

However, the oil bond purchases were now at significantly higher yields.

Bankers said that on Wednesday the RBI had provided support to Hindustan Petroleum Corporation, the public sector refiner, picking up the 8.40 per cent 2025 oil bond at a yield to maturity (YTM) of about 9.52 per cent. The amount provided to the refinery, traders said, was close to about $105 million.

At the SMO, the RBI picked up the oil bonds at slightly higher yields than comparable sovereigns.

The spread was 100 basis points more than YTM of 8.65 per cent for the 6.01 per cent 2028 sovereign issue.

The high spreads also attracted small institutional players such as provident funds. PFs picked the 8.40 per cent 2025 oil bonds at yields of 9.65, amounting to just Rs 3 crore,

But bankers said the high yields on the oil bonds were a pointer of rising funding costs of oil companies and e tightening liquidity.

Traders have begun interpreting the high YTMs on RBI’s oil bond purchases of further hike in the repurchase rates in the coming weeks.

Despite the anticipation of a hike, at today’s liquidity adjustment facility auctions, the recourse was entirely to the reverse repurchase window of the RBI.

At Thursday’s auction, bids for reverse repos amounted to Rs 13,315 crore. Reverse repos implied removal of overnight liquidity from the banking system through placement of government securities. But this was largely a one-off situation, bankers said, since tomorrow was a reporting Friday. Consequently there was little demand for overnight liquidity during the period.