The Hindu Business Line : G-secs to stay in favour despite RBI rate cuts

Bangalore, Dec. 7 Bond yields headed further south as banks rushed to buy up securities anticipating a reduction in the Reserve Bank of India’s policy rates.

Traders said bonds were also buoyed by the surge in deposits and falling international oil prices. Bank deposit accretions are currently taking place at about Rs 4,000 crore per day. Time deposits this year have surged by 16 per cent this year as a result.

During the corresponding period of last year, the growth was just 13 per cent. As a result, demand for government securities continued to dominate the banking system.

The slight dip in credit off take also helped bonds. Several large corporates held back from drawals from their credit lines in anticipation of week-end rate cuts. This, along the surge in deposits, created a temporary liquidity overflow. This translated into recourse to the Reverse Repurchase window at the week-end Liquidity Adjustment Facility (LAF) auction, which touched Rs 45,095 crore.

FII exit continues

The liquidity build-up was despite the continued Foreign Institutional Investor exit from emerging markets including India, as deleveraging gathered pace in the US markets. FIIs exited from equities and several of them moved into government securities to pick up gains once bond prices rose. FII debt purchases last week amounted $221.3 million. However, there were little inflows during the week, on either capital or the merchandise trade account. Since the outflows were also limited, exchange rates held firm at Rs 49.69 to the dollar as against last weekend’s level of Rs 49.84.

Forward premia also retreated, as refineries that had already covered their exposures, stayed away. The only customers taking forward covers were capital goods importers and corporates with cross-border liabilities. Forward premia for one, three, six and 12 months ended the week at 4.95 per cent (7.46 per cent), 3.58 per cent (4.64 per cent), 2.48 per cent (2.98 per cent) and 3.76 per cent (3.75 per cent). Short forward, three- day, premiums, however, widened to 5.89 per cent (4 per cent) last week end. This was largely on account of foreign bank purchases of securities for taking advantage of a possible cut in policy rates.

Rupee declining

Despite the narrowing forward premia, the upside risks remained high. HDFC Bank’s monthly economic review, EcoTalk, said, “The rupee is unlikely to buck the depreciation trend of other Asian currencies. Global, rather than domestic, fundamentals are likely to drive the rupee over the next six months and most of the pressures on emerging markets in general are likely to apply for the rupee as well.”

However, liquidity appeared comfortable, evident from the drop in call money rates to below the reverse repo rate of 6 per cent. Besides the cut off yields at the weekly Treasury Bill auctions dropped sharply. The cut-off yield on the 91-day T-Bill was 6.58 per cent, a drop of 56 basis points over the previous week. The weighted yield was down to 6.52 per cent.

But the 364 day T-bill yield movement was a pointer to sliding interest rates. The yield on the 364-day T-bill was 6.3 per cent or just 30 basis points over the prevailing reverse repo rate of 6 per cent. The preference remained for long term securities as the bid-to-cover ratio was 6.5 times for the 364 day T-bill as against the 91 day T-bill ratio of 5.11 times.

The 10- year yield to maturity also followed this pattern dropping to 6.89 per cent, down from the previous week’s level of 7.16 per cent. Traders’ expectations were confirmed when towards the week-end, the RBI snipped 100 basis points of the reverse repo to 5 per cent and the repo rate to 6.5 per cent. Traders also took cues from the RBI’s purchase of the 8.20 per cent 2023 oil bonds from the Hindustan Petroleum Oil bonds at 7.51 per cent or 25 basis points over comparative sovereign YTM of 6.26 per cent.

Positive undertone

The undertone in the markets remained positive as average trade volumes remained at Rs 17,000 crore a day or double the daily equity turnover of the National Stock Exchange. This is the highest level that bond volumes have reached. Clearly, this trend reflected the acceleration in deposit inflows into the banking system.

The acceleration was also evident from the resources mobilised by public sector banks through Certificates of deposits during the week. At least Rs 2,000 crore was raised through one year CD, as corporates moved to banks even at rates as low as 9 per cent. But yields could drop further, traders said. This was largely in view of retreating global oil prices. The oil import basket price was already down to $42.41 a barrel. Bankers said that one key factor driving this trend was the slowdown in credit off take. Incremental credit deposit ratio for the current fiscal was down to 83 per cent, down from the 90 per cent two weeks ago.

However, the slowdown was also partly on account of capital constraints by banks. Bankers said that most of them had reached their capital limits for the absorbing risk weighted assets.

Banks are currently expected to maintain CRAR of 12 per cent, higher than the regulatory requirement of 9 per cent. Credit, other than retail credit, is risk weighted at 100 per cent. Only government securities are zero risk weighted assets.

As a result government securities remained the flavour of the season. This was expected at least till the end of this financial year.

The preference was expected to benefit the state development loan issues slated for the week and the residual portion of government borrowings of Rs 45,000 crore for the current financial year.

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