The Hindu Business Line : Bonds stable; traders nervous over move to contain inflation

Bankers said that the nervousness stemmed from the Finance Minister's statement at the Bankers Conference in Hyderabad. The Finance Minister, Mr P. Chidambaram, said, "The Government will take stern fiscal measures to contain inflation to 4 per cent." Inflation currently is at 5.41 per cent. But inflation was expected to be contained largely on account of softening international oil prices. The weighted price is now close to $51 a barrel.

Since the statement comes close on the heels of the Reserve Bank of India hiking the repurchase rate to 7.25 per cent last week and increasing the reverse repo band to 125 basis points, there is an increasing speculation that the fiscal measures being contemplated would lead to withdrawal of some of tax concessions to certain sectors. This includes the real estate and the housing sectors, where there are fears of an `asset bubble' build-up.

But not many bankers are worried about the `asset bubble' build-up. Says the Karnataka Bank Chairman and Chief Executive Officer, Mr Ananthakrishna, "Only banks with retail assets in excess of 25 per cent of their gross advances need to be worried about this asset bubble."

The fears notwithstanding, liquidity in the banking system expanded after nearly two weeks. At last week's liquidity adjustment facility auction, the RBI mopped up Rs 8,315 crore through 3-day reverse repurchase operations. Even at 6 per cent (reverse repo rate) the mop-up was taking place indicated that liquidity was not a problem. That liquidity was lax was also evident from the unchanged cut-off and weighted average rates at the weekly Treasury bill auctions. At the 91-day T-Bill auctions, the cut-off yields were fixed at 6.64 per cent. But the interesting event in this auction was that the bulk of the mop-up, that included the market stabilisation scheme component, came from non-competitive bidders. Competitive bids accepted at the auction were only Rs 602 crore, whereas the entire non-competitive bids amounting to Rs 2,000 crore was accepted at 6.65 per cent.

`Liquidity not a problem'

The Corporation Bank's Chairman and Managing Director, Mr B. Sambamurthi, said, "This should be evident that liquidity is not a problem." If liquidity becomes tight, the MSS could always be released, bankers said.

In fact, with this expectation, yields hardened only marginally to 7.66 per cent on a weighted average basis, up from last week's 7.65 per cent.

Yet, bankers were warned by the RBI's Deputy Governor, Dr Rakesh Mohan, that the current situation would not last for long, if the current pace of 8 per cent GDP growth was sustained. Dr Mohan said, "Banks should focus on raising resources for meeting the non - food credit requirements. They should shift focus from bulk deposits." The warning was particularly on account of the volatility in the money markets clearly indicating that it was caused by bulk deposit redemptions by life insurance companies.

In fact, this was also one of the major factors that kept the trade volumes low in the debt markets. This was because bankers found themselves compliant with the Statutory Liquidity Ratio of 25 per cent, and were able to absorb bulk deposits without any additional need for purchase of securities. In fact, most purchases were being made only on the trading account, available for sale or held for trading categories.

But the RBI's warning comes at a time when bulk depositors, particularly life insurance companies and corporates, are redeeming their deposits, both for investing in the equity markets and for meeting investment capital requirements.

There are, however, no fears at the banks' end, since few in any case anticipate any financial instability. That there was little fear from banks on this sphere was evident from the low-yield spreads. One to 30-year yield spread was just 114 basis points. If there was fear, spreads at the long end would have widened, as more moved to the short end.

One banker said, "We will mop up resources, and there is always the savings pool that will remain as long term resource base." In fact given this focus, there has been an accretion in the savings deposits of banks, that is now clearly in excess of 55 per cent for some of the public sector banks unlike in the past when time deposits comprised nearly 70 per cent of their working funds corpus.

Clearly, this is the focus in the shift to rural areas, where accretions to the savings pool is expected to provide substantial support to banks' low cost deposit pool. Savings deposits are still priced at only 3.5 per cent.

It is with this accretion banks are now looking to sustain the high credit deposit ratios and even refinance some of the maturing bulk deposits.