Little change in bond prices after 2G auction fiasco

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Bond prices changed little for the third week in succession as fiscal uncertainty heightened after the government telecommunication spectrum auction became a complete fiasco.

The 10-year benchmark sovereign bond, the 8.15 per cent falling due in June 2022, was priced at 99.71 (face value Rs 100) translating to a yield of 8.20 per cent. The previous week the security was priced at Rs 99.64.

The relative stability in bond prices was largely on account of the expected increase in government borrowing over the estimated Rs 20,000 crore, traders said. A trader with a public sector bank said, “With spectrum auction comple­tely failing, we expect government borrowing to rise substantially, above the Rs 5.9 crore revised estimated for this year.”

The steady yields were despite the comfortable cash conditions in the banking system. The easy cash conditions manifested in softening of rates in the collateralised borrowing and lending obligations markets, where all financial institutions participate. Rates in the CBLO markets dropped to 7.81 per cent. However, borrowing from Reserve Bank of India’s repurchase window, an overnight support mechanism for banks and primary dealers against a collateral of government securities, amounted to Rs 1.10 lakh crore or about 1.75 per cent of aggregate deposits.

Bank officials said that the high overnight borrowings were largely on account of cash demand during the festive season. Federal Bank president Ashutosh Khajuria said, “Liquidity is really comfortable in the banking system. It is only the cash demand that has led to the high overnight borrowing.” It is also during this season that purchases of commodities including jewellery are high, leading to the cash demand.

Besides, credit off take remained low even during the festive season. According to the RBI’s data, non-food credit demand last week was just 43 per cent this year so far, as against 51 per cent during the corresponding period of last year. Last year was a year of weak credit growth. Non-food credit growth this year is the lowest since 2009-10, when it was 39 per cent.

The consequent high cash resulted in a high turnout for government borrowings. Last week government bids at the auctions were 2.4 times more than the offered amount of Rs 13,000 crore. This was despite the high holding of sovereign bonds by banks. Banks hold at least 32 of the deposits in sovereign bonds as against the mandated investment of just 23 per cent.

But oversupply of certain categories of bonds remained a source of worry. The trader said, “Demand is more for long term bonds and less for shorter ten­ures.” The oversupply was more in the issue of 10-year bonds, when the demand was for longer tenor securities. The demand for long tenor securities was evident from the high prices for long tenor securities. Long tenor securities like 8.97 per cent 2030 are priced above face value at Rs 106, whereas shorter tenor securities are priced below the face value.

The preference for long-term securities was partly on account of macro-economic factors that limited the leeway for policy rate reductions. Morgan Stanley economists, Upasana Chachra and Chetan Ahya said, “We believe that inflation may remain above RBI’s comfort zone for longer period. Hence, we expect policy rates easing to be limited to about 50 basis points in 2013.”

BNP Paribas Asia economist, Mole Hau, said, “Headline inflation is likely to overshot RBI’s projection by almost a full percentage point based on our forecasts. Therefore RBI will find space to ease policy further compressed.”

Exchange rate movements also compounded inflation worries. If the core inflation eased in October by 40 basis points to 5.17 per cent, it was largely on account of the 2.5 per cent exchange rate appreciation during the period. But with Europe in recession, risk aversion has mounted. That risk aversion reflected in the non-deliverable forward (offshore trading in rupees with settlement in dollars) markets where foreign institutional investors hedge. In the NDF market the dollar was priced at Rs 55.50 or well above the domestic on month forward rate a pointer that foreign exchange markets would most likely continue to remain in a state of tumult.

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