The Hindu Business Line : Banks, life insurers turn active buyers of bonds

Traders said that the key factors driving domestic yields were the Reserve Bank of India's interventions, exit by foreign institutional investors and foreign currency purchases by some of the large oil companies. Most foreign banks and foreign institutional investors confused by statements made by Fed chief, Mr Alan Greenspan, were the largest sellers of securities and at the same time were purchasing foreign exchange.

This was because a rise in interest rates in the US would allow them to realise better yields on dollar securities and also benefit from the subsequent hardening of the exchange rate. Despite remarks to the contrary, traders believed an interest rate hike was inevitable in the US.

Besides, traders said that oil companies were also active in the market sourcing foreign exchange. Oil companies preferred the spot markets in view of the high international prices. However, traders said that most of them had already tied up their supplies through futures, but have left some of their foreign exchange position open. It was only the public sector oil companies that follow a pricing linked to the international spot markets. These companies sourced dollars in the spot markets driving down the exchange rates and leading to a drop in yields.

What also ensured range-bound yields was the mopping-up operations by the RBI.

The outstanding amount on the 7-day repos was close to Rs 71,000 crore. Last week, there was also an additional mop-up through reissue of long dated securities - 6.01 per cent 2028. This was placed at a yield to maturity of 5.79 per cent.

Despite these mop-ups, yields on the 91-day T-bill auctions remained below the repo rate at 4.43 per cent. The weighted average yields, which included non-competitive bidders, was even lower at 4.37 per cent. This implied that liquidity continued to be surfeit in the markets.

This situation ensured that the 10-year yield to maturity (YTM) remained at 5.12 per cent on a weighted average basis, marginally higher than the previous week's 5.13 per cent

Traders said that the undertone in the markets remained firm. This was evident from the shrinking spreads between one year and 24 years. These spreads were in the region of about 126 basis points last week, against the previous week's 130 basis points. Besides, trading volumes also remained high, with the daily average being in the region of Rs 6,000 crore.

Large buyers in the market were insurance companies, especially life insurers. Foreign banks' selling also released some securities like the 9.81 per cent 2014 into the market. Traders said that insurers picked this security at 5.16 per cent, in view of the small volumes available. Banks were also active buyers. However, traders were focussed on the 2017 tenor securities, which logged up at least 25 per cent of the market's volumes. The most sought after securities were the 7.46 per cent 2017 and 8.07 per cent 2017.

In both these securities, the daily trading volumes were upwards of Rs 700 crore. The focus on the long end indicated that interest rates were likely to remain soft, for some more time, at least until the dollar interest rates change, according to traders.

What also kept yields soft were the high recoveries of non-performing assets. They said that most of the banks were parking some of the cash realised through NPA recoveries in G-Secs, pulling down yields.

Besides, real yields have remained low despite the rising oil prices in the global markets. What kept the liquidity at the current high level were the inflows. Foreign exchange accretions based on the current account and non-debt capital account flows were $611 million, of which foreign currency accretions alone were $637 million even after assuming exchange rate variations, after the four per cent depreciation of the rupee last week.

Further, with the beginning of the lean season, credit offtake decelerated. However, demand deposits have also shown a negative growth.

This was partly due to the fact that large corporates were shifting from current account deposits to government securities, in particular treasury bills. This was one of the major factors that resulted in a steep draw down in demand deposits last week, by at least Rs 13,000 crore.

Bankers are, however, finding innovative ways of building risk-weighted assets. The methods include swapping G-Secs with financial institutions with risk-weighted assets. Pricing, however, remained a sticky issue, though Rs 500 crore of assets have already moved.

These methods notwithstanding, credit growth last week decelerated and actually showed a negative growth. Though with deposit growth also falling, there was little impact on the credit deposit ratio.

CD ratios remained at 56 per cent. Corporate credit offtake is expected to show big jumps, after the new government takes over. Most of them are unwilling to commit into project expansion, without being convinced of policy continuity.

Moreover, bankers and provident funds are beginning to become worried over the impact of State Government guaranteed securities. Most States have adopted the unfunded guarantee route for raising funds.

The outstanding amounts on these bonds are now estimated to be in excess of Rs 75,000 crore. With these worries, some banks are quietly preparing to bite the bullet and begin invoking the guarantees.