C. Shivkumar

Bangalore , April 27

IN a bid to stem the rise in yields, the Reserve Bank of India is likely to prune the amounts mopped up through the market stabilisation scheme (MSS).

Bankers expected the pruning to take place during the lean season credit policy announcement. The MSS was intended to siphon out excess liquidity in the banking system. Under this scheme, the amounts are included as part of the Treasury bill auctions. In the 91-day T-bill auctions, it is Rs 1,500 crore, in the 182-day and the 364-day T-bill auctions, Rs 1,000 crore each.

However, during the last few months, most of the banks have begun showing increasing preference for shorter tenor government securities. This was partly because shorter dated securities such as the treasury bills are more liquid.

This preference has resulted in most of the T-bill auctions being oversubscribed. Bankers' preference for liquidity also stemmed from the possibility of high credit off take. Increment credit deposit ratios for most banks are over 100 per cent, a trend that was expected to continue this year as well. The sources said bankers' preference for T-bills was also due to the high spreads. The 91-day T-bills currently offer yields of 5.2 per cent, which was over 1 per cent over the short-term deposit rates. Moreover, parking in T-bills also allowed the banks to comply with the statutory liquidity ratio requirements.

As a result of the preference for the T-bills the RBI has raised close to Rs 10,000 crore since the beginning of this fiscal by way of MSS. But, whatever amount was raised through the MSS does not accrue to the Government directly, but is instead held by the RBI.

The large MSS mop-up has resulted in pushing up the ten-year yield to maturity to rise to 7.10 per cent, or at least 2 per cent over the previous year's levels, bankers said. In fact, for most of 2003-04, the yields on Government borrowings were less than the bank rate and closer to the revere repo (reverse repurchase rate). Since the middle of last fiscal year, however, yields were over the bank rate indicative of the hardening trend.

This would imply a steep increase in the costs of government borrowings with the corresponding impact on the interest costs and the revenue deficit. The Government borrowing for the current fiscal year is estimated at Rs 1,25,310 crore. Getting subscription for long-term borrowings was becoming increasingly difficult, the sources said particularly at a time when banks were surfeit with SLR securities, evident from the high investment- deposit ratio of about 44 per cent. This lack of interest resulted in rising yield expectations and high underwriting fees being paid out at the auctions, the sources said.

Consequently, the pruning of the MSS bankers said was to contain any potential rise in the cost of government borrowings during the current year. Further, bankers said that the rise in yields would also likely translate into further increases in interest rates across the board. This was because there was a minimum spread of at least 150 basis points between top-rated borrowers and sovereign borrowing rates. Bankers said that the RBI had repeatedly emphasised to them that the current regime of the soft interest rates would continue for some more time. As a result, not many of them foresee any hikes in either the reverse repo rate or the bank rate.

Pruning of the MSS, bankers said, would help sustain the soft interest rate bias.

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