C. Shivkumar

Bangalore, May 16

BANKS have begun using the market stabilisation scheme (MSS) to restrict depreciation risk of their investments in government securities.

Banking sources said that most of them have begun switching over to parking funds in the treasury bills given the hardening interest rates.

Bankers said that the switch over was facilitated by the large availability of T-bills through the MSS scheme. In fact, despite liquidity tightening in the markets, yields on T-bills have softened.

Since the beginning of this year, the amount sucked out was over Rs 25,000 crore on a daily basis. But last week, the amounts sucked out dropped to about Rs 11,000 crore, indicative of a tightening liquidity.

On the other hand, the yield on the 91-day T-bill last week was 5.20 per cent down from 5.33 per cent since the beginning of this fiscal. This softening has taken place despite the hike in the reverse repo rate by 25 basis points to 5 per cent.

Moreover, the weighted average yields have remained at least 3 to 5 basis points below the cut of yields indicative of the enthusiastic response.

The RBI mops up anywhere between Rs 3,500 and Rs 4,000 crore through T-bill auctions every week. This comprised Rs 2,000 crore through 91-day T-bills, Rs 1,500 crore through 182 day T-bills and Rs 2,000 crore through 364 day T-bills.

Auctions of the 182 and the 364-day T-bills are held on alternative weeks. The amount mopped up included resources raised through normal auctions and the MSS.

The amounts raised through the normal auctions comprise part of the public debt, whereas the MSS is not treated as public debt, instead held as a balance with the RBI.

Bankers said that the trend in the T-bill yields was diametrically opposite to what is happening in the dated securities markets. In the case of the dated securities, the cut-off yields have hardened since the beginning of this year. For instance, the ten-year yield which was 6.73 per cent since the beginning of this year has hardened by at least 50 basis points.

Bankers said that this divergence was entirely on account of MSS, since most of them preferred to park their funds in T-bills. Part of the reason for this trend was the attractive yields that T-bill yields offered. The spread on investments in T-bills is at least 1 per cent over the weighted average cost of working funds. Besides, T-bills are highly liquid instruments and with very negligible potential to damage banks' investment books.

The flip side to this shift in preference to T-bills is that government borrowings would come under pressure, bankers said. This implied that the Government would have to offer higher coupons on their borrowings in the coming weeks.

(This article was published in the Business Line print edition dated May 17, 2005)
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