The Hindu Business Line : Further softening of interest rates likely

Traders said that the optimism over further softening in interest rates was affirmed by the retreat in inflation rates to 4.3 per cent. This , despite the oil prices testing new highs of $38 per barrel. Hints of interest rates softening were evident from the bids received for the first 3-day weekend repo auctions of the new fiscal year.

The Reserve Bank of India (RBI) mopped up close to Rs 45,000 crore. In addition, the first 7-day repos mopped up a modest Rs 2,350 crore, though the second auction raised a little over Rs 5,300 crore. The total liquidity mopped up during the week was over Rs 50,000 crore.

The good response to the liquidity auction, traders said was also because some players preferred to restrict their participation in the T-bill auctionsin view of the unattractive cut-off yields. The cut-off yields for the 91-day T-bill auction was 4.37 per cent, whereas the weighted average yield at which the bids, both competitive and non competitive, were accepted was 4.25 per cent.

Similarly in the case of the 364-day T-bill, the cut-off yield was 4.45 per cent whereas the weighted average yield was 4.35 per cent. Since the effective yields on the repos were far more attractive, most banks preferred repos to T-bills.

This has led to an anomalous situation in the short-term money markets, where longer end yields are higher than the 3-day or the 7-day repos. Traders anticipate some correction in these anomalies, when the Market Stabilisation Scheme (MSS) auctions of the RBI begin. The first phase of these auctions is expected to coincide with the 91-day T-bill auctions.

The 91-day T-bill auctions would have two components, one comprising of a normal auction amounting to Rs 500 crore, and another auction in the form of an MSS, amounting to Rs 1,500 crore.

These auctions would be followed by reissue of the 6.18 per cent 2005 security for Rs 5,000 crore.

There would also be 7-day repo auctions, on April 5, 6 and 8. Further, there was also the possibility of one 6-day repo auction on April 7, according to the RBI's liquidity control calendar.

Traders expect the next week's auctions to signal the direction of interest rates. The 10-year YTM ended last week at 5.13 per cent on a weighted average basis, as against the previous week's figure of 5.17 per cent. The undertone remained bullish, evident from the sudden spurt in trading volumes. Daily trading volumes averaged upwards of Rs 6,000 crore and towards the weekend, overshot Rs 7,000 crore. With inflation rates down, most of them calculate that bond prices were likely to continue their northward shift. Most of the activity was however in the 7.46 per cent 2017, 7.49 per cent 2017 and the 8.07 per cent 2017.

But traders said that the liquidity build-up was mostly driven by inflows from non-resident Indiansopting for the non-repatriable rupee deposits. Traders said that this trend was one of the major factors that influenced the decision against intervention in the spot markets. Besides, some borrowers for ECBs have also begun taking forward covers ahead of their repayment schedule. This was besides the oil and other capital goods importers.

The rush for forward covers by importers to lock into the current exchange rates have pushed up the forward premia at the short end to an one-year high of two per cent. However, at the long end, in particular, for six months and 12 months, forward premia continued to be low.

Most of the forward covering took place when the rupee-dollar equation breached the 43.50 barrier, traders said.

Traders and importers expected that breach of this level would provoke interventions by the RBI. In fact, this was precisely what happened during the week. This buying was entirely by public sector banks and did not reflect in the accretion to the foreign exchange reserves. Last week, for instance, the accretion to the foreign exchange reserves was just $319 million, exactly at the targeted level.

But some of the inflows are also being choked with view to controlling the liquidity build-up.

This trend was evident from the banking liabilities of the US institution to Indian banking entities. The liabilities have increased sharply over the last one year.

The increases are partly on account of the fact that purchases of foreign exchange are directly done by some of the banks, including the State Bank of India.

These figures include balances held by Indian entities, including correspondent accounts with US banks and dollar-denominated deposits maintained by Indian entities and individuals with US-domiciled banks. These figures also understate the actual quantum of foreign exchange reserves of the country, bankers said.

Bankers said that the increased holding of balances with US banks by Indian banks also helped reduce the burden of sterilisation on the RBI. These reserves, however, have helped restrict the exchange rate appreciation and the consequent impact on liquidity generation.

Some of the banks have already lowered their farm lending rates.

This drop in lending rates is likely to spread to other banks as well, bankers said. Last week, non-food credit offtake was close to Rs 16,000 crore. Some of this was funded by liquidation of investments. Banks liquidated at least Rs 4,500 crore of investments. Still, the investment deposit ratios continue to be high at 45 per cent and credit deposit rates at 56 per cent. However, on an incremental basis, credit deposit ratios were actually over 75 per cent. Bankers said that the liquidity build-up through the foreign exchange market did not allow the credit offtake to push up yields.

But bankers said that falling interest rates were unlikely to have any big impact on earnings. NPA accretions are less than one per cent, and in some cases actually zero. Consequently, smaller spreads were sustainable, bankers said. Even for such lower spreads, bankers have become circumspect. Preferred non-SLR investments were in high-rated companies or entities, which were prepared to list their securities. It was only these entities that have been able to raise funds at sub-PLR rates. But even here pricing is clearly evidence of the risk perception. For instance, Sardar Sarovar bonds were priced at 8.25 per cent and GAIL bonds at 5.85 per cent.

Unlisted securities are priced at least 150-200 basis points over the Sardar Sarovar issue. Clearly unlisted bonds, mostly by special purpose vehicles and power utilities in the States, have become junk bond categories.

More Stories on : Govt Bonds | Interest Rates

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

Stories in this Section
Rayalaseema Bank posts all-time high profit of Rs 28 cr

Gulf migrants remittances — `Alternative to hawala working well in UAE'

Further softening of interest rates likely

IOB to ramp up priority sector lending in lead dist

Prudential Co-op Bank depositors in a quandary; threaten stir