C. Shivkumar

Traders said liquidity was mostly on account of the large non-debt capital account and current account invisibles, including remittances inflows. High oil prices fail to make any impact

Bangalore , April 23

Bonds continued their rally for the second successive week powered by liquidity generated by the Reserve Bank of India's open market interventions. Traders said that the record high international oil prices had little impact.

International oil prices reached $75 a barrel. For India, this would mean that the basket price would be close to about $510 a tonne on a weighted average basis. However, despite the large presence of oil companies in the foreign exchange market, yields softened.

Non-debt capital a/c

Traders said liquidity was mostly on account of the large non-debt capital account and current account invisibles, including remittances inflows. The average inflows were in excess of $200 million per day prompting interventions by the RBI in the foreign exchange market. In addition, there was also the liquidity created by continued unwinding of the Market Stabilisation Scheme securities issued last year.

Repo collections

The RBI as a result mopped up close to Rs 62,170 crore through three-day reverse repo auctions, very close to the highest mop-up made in 2003. The liquidity also resulted in pushing down the yields on Treasury bills last week at the weekly Liquidity Adjustment Facility auctions. The cut-off and weighted yield on the 91-day T-bill remained below the RBI's reverse repo rate of 5.50 per cent, at 5.41 per cent and down 8 basis points over the previous week. Similarly, the cut-off yield on the 182-day T-bill also retreated to 5.61 per cent though the weighted average moved close to the reverse repo rate at 5.56 per cent.

The inflation factor

The 10-year yield-to-maturity (YTM) also softened to 7.42 per cent last week on a weighted average basis , down from 7.56 per cent. What also contributed to the retreat was the inflation number of 3.24 per cent. But the one-year real yield was 2.9 per cent, way ahead of international levels.

Firm outlook

The undertone was firm. This was apparent from the increased trade volumes. Daily trade volumes were close to Rs 2,000 crore. The outlook also remained firm. This was partly on account of steps taken by the RBI to extend repurchase of State development loans as well. Moreover, traders said that most action last focussed on the short end of the yield curve. But insurers were active, taking advantage of the new SDL guidelines. This allowed them to switch their portfolios to long maturity securities. Banks also picked up short-dated SDLs . This increased activity resulted in pushing down the spreads between one and 29 years to 171 basis points, unlike the previous week when it was close to 200 basis points.

Besides, bankers said, what also helped the retreat was the RBI's commitment to ensure adequate liquidity in the markets. This was evident from the RBI Governor's Dr Y.V. Reddy's, answer to a query, "We do not see immediate need to introduce the MSS." MSS will remain, however, as a tool. But a new weapon was unleashed for credit control. This weapon, for containing unbridled credit growth in certain sectors,was higher risk weightage and provisioning. Consequently, the objective of squeezing credit to sectors such as commercial real estate was attained without collateral impact. Bankers said that most credit growth increase as a result was likely to focus on undercovered sectors, especially the farm sector. This was also because farm sector credit is barely 10 per cent of GDP far lower than Asian standards. Therefore, credit-deposit ratios itself would unlikely be impacted in the coming months, traders said.

Investments in G-secs

However, what was likely to face resistance was Government borrowing. This was in view of the high investment deposit ratios of banks. Investments by banks in Government securities have steadily dropped over the last two years. One reason for this trend was that investment-deposit ratios of banks are about 37 per cent, way above the prescribed SLR of 25 per cent. Bankers said that unless yields were attractive generating a good spread over the weighted cost of working funds, credit would still be preferred over G-Secs. This could mean that yields would likely be on the high side for the twin auctions for Rs 10,000 crore next week.

Credit, on the other hand, especially farm sector, offered good spreads and had better track record. The average spread in farm credit over the weighted average cost of working funds is about 4 per cent. This was, therefore, now likely to be the next big credit push.

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