The Hindu Business Line : Bonds firm on increased Govt borrowings; outlook positive

Bangalore, Feb. 1 Bonds firmed last week on the back of increased Government borrowings and the Reserve Bank of India calibration of liquidity expansion in the banking system.

Traders said the firm trend was also drawn with the RBI signalling its intent for stability at current levels. The intent was evident from the pricing of the new issue of the ten-year security. The cut-off yield to maturity (YTM) on this security was 6.05 per cent and weighted average yield was 6.01 per cent.

Besides, the RBI’s moves were also evident from the high notified amounts on the 91-day Treasury-Bill (T-Bill) placements, which averaged about Rs 8,000 crore, in the last few weeks. This implied that redemptions of securities, including T-bills issued through market stabilisation scheme, were actually mopped up. One reason for this trend was the inflation focus of the RBI. The RBI’s current target was to decelerate inflation to 3 per cent before the end of the financial year. Consequently, liquidity expansion was closely regulated.

However, despite the calibration, liquidity was comfortable. This was evident from the weekend liquidity adjustment facility auctions where the recourse was mostly to the reverse repurchase window. Reverse repurchase implies removal of overnight liquidity through sale and subsequent buyback of securities, mostly government securities. The recourse to reverse repurchases amounted to Rs 56,510 crore.

Exporters were repatriating their receipts at an accelerated pace instead of holding them in cross border accounts, traders said. In addition, there were also large inflows into non-resident ordinary accounts, bankers said. Besides, refineries were beginning to leave some foreign exchange exposures uncovered, with the rupee appreciating and oil prices retreating. Currently, the import basket prices are about $43 a barrel.

The inflows and low demand reflected in the rupee-dollar exchange rate firming to Rs 49.02 last weekend, up from Rs 49.19. Forward premia across all tenures remained stable, as a result. One, three, six and 12 month premia ended last week at 3.70 per cent (3.81 per cent), 3.10 per cent (3.23 per cent), 2.38 per cent (2.26 per cent) and 1.92 per cent (1.84 per cent). The comfortable liquidity in the banking system also resulted in a sharp drop in the cash to spot forward premia to 1.76 per cent (3 per cent). Cash to spot forward premium normally tracks call money movements. Call money rates towards the weekend were down to 2 per cent. This resulted in narrow dollar -rupee overnight money market interest differentials.

The rupee’s firm trend was despite foreign institutional investors remaining sellers. Net FII sales of both equity and debt were about $130.5 million last week. That this trend was likely to continue was evident from the movement in the non-deliverable forward markets, where the exchange rate was Rs 49.05, up from the previous weekend’s Rs 49.20. (NDFs are offshore rupee trading, where settlement is done in foreign currency, mostly in dollar). Traders said that the narrow differentials also shrank arbitrage opportunities. Traders attributed the trend to the tight dollar liquidity situation in the US markets as some more financial sector casualties are expected in the coming weeks.

T-Bill auctions

The comfortable rupee liquidity had little effect at the weekly T-Bill auctions. The yields on the 91-day bill hardened to 4.78 per cent from the previous week’s 4.67 per cent. The weighted yield also firmed to 4.70 per cent. But at the 364-day T-bill auctions, the cut-off and weighted yields were lower at 4.59 per cent and 4.55 per cent respectively.

The 10-year YTM, though, hardened to 6.02 per cent on a weighted average basis, up from 5.53 per cent the previous week. However, CARE’s Chief Economist, Dr Soumendra K. Dash, said, “The additional flood of bond issuance is exerting upward pressure on yields.”

In fact, during the last week, in addition to the Rs 9,000-crore mop-up through T-bills, there was an additional government borrowing of Rs 10,000 crore. Besides, the 10-year security, the government borrowings also included reissue of the 7.56 per cent 2014 and 6.83 per cent 2039 securities. Both these securities were placed at 6.02 per cent and 7.35 per cent respectively.

“Besides, slashing key policy rates frequently leaves yields in a range to fluctuate,” Dr Dash said. Between December and January, the reverse repo has come down by 200 basis points.

The undertone remained positive, though there was a downside propensity. Daily average trade volumes last week were Rs 11,000 crore, down substantially from the previous week’s level of Rs 13,400 crore. The difference between equity volumes though narrowed. Equity trade volumes on the NSE were Rs 9,879 crore.

Traders said that despite the rising equity trade volumes, the outlook for bonds remained positive. The buoyancy in bond markets was apparent from the high bid to cover ratios at the auctions. The bid to cover ratio ranged from 1.69 times to 4.51 times, with a bias towards the long duration securities.

Traders said the bias was because more policy interventions appear imminent, as the Government and central bank, attempt to insulate the Indian economy from the global financial sector meltdown. The policy flexibility was partly due to the inflation retreat, despite the slight up-tick last week. Last week, the whole sale price index moved up to 5.64 per cent.

HSBC’s head of the Asia Economics team, Mr Robert Prior Wandesforde, said, “A few more negative export and industrial production prints, together with further falls in WPI inflation, could prompt another move (rate reduction) as early as February.” However, there are qualifications in such expectations. Leeway to reduce rates is limited unless the savings bank rate, which is currently at 3.5 per cent, is cut. In an election year that appears unlikely.

But some rate actions by banks have already begun. Public sector banks, beginning with Punjab National Bank, kicked off prime lending rate reductions by 50 basis points to 11.5 per cent. The reductions though have not translated into actual lending rate cuts. Borrowings by triple AAA rated corporates continue to remain in double digits, though are falling. Last week, Tata Communications’ Rs 250-crore bond issue was priced at 11 per cent at a discount to the current BPLR. The borrowing though was still priced at a premium of about 500 basis points over comparable sovereign issues. The spread of PSU AAA was only about 250-300 basis points as was evident from the pricing of Neyveli Lignite’s Rs 600-crore issue.

However, these spreads are unlikely to last for long, as banks find deposit costs falling. Costs of certificates of deposits for up to a year are already down to 6.5 per cent. Besides, incremental credit deposit ratios were down to 55 per cent for this financial year so far, powered by surging deposits. Corporate borrowing costsconsequently are also likely to see rapid falls in the next few weeks.

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