The government may buy more bonds from the market to ease the worst cash crunch in 10 years, according to companies obliged to bid at debt auctions.
The yield on benchmark 2020 security has dropped 10 basis points (bps) from a 26-month high of 8.21 per cent in the past week as the Reserve Bank of India bought back Rs 10,100 crore ($2.2 billion) of securities on behalf of the finance ministry. Policy makers may purchase Rs 30,000 crore of notes for the rest of the financial year ending March, according to ICICI Securities Primary Dealership and IDBI Gilts, including Rs 12,000 crore tomorrow, the most this quarter.
“The banking system is short of liquidity, so the RBI may want to address that through bond buybacks,” said Manoj Swain, chief executive officer at Morgan Stanley India Primary Dealer in Mumbai, without specifying how much policy makers would purchase.
Governor Duvvuri Subbarao said on December 9 he was “deeply conscious” of the shortage of cash in the banking system, even as inflation stayed above the central bank’s “tolerance level.”
A government report on Tuesday will show benchmark inflation having cooled to 7.45 per cent in November from 8.58 per cent in October, according to the median estimate of economists in a Bloomberg survey, compared to 8.1 per cent in Russia, 5.1 per cent in China and 5.6 per cent in Brazil.
The central bank injected an average Rs 81,800 crore every day into banks this quarter, the most since 2000, according to data compiled by Bloomberg. The amount the lenders borrowed is an indication of the shortage of funds in the financial system. The government raised Rs 67,720 crore by auctioning third-generation phone licenses in May and Rs 38,540 crore by selling Internet permits a month later, draining cash from lenders.
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Yields climb
The cost of fixing rates on money for three months surged 293 bps, or 2.93 percentage points, this year to 6.88 per cent in the interest-rate swaps market, data compiled by Bloomberg show. Overnight loan rates between banks averaged 6.6 per cent this month, twice the rate a year ago.
The yield on the 7.8 per cent bonds maturing in May 2020 climbed two bps to 8.11 per cent yesterday on concern tax payments will deplete cash in the system. Such payments will total Rs 50,000 crore this week, according to ICICI Securities Primary Dealership.
“Bond purchases may be a key tool policy makers will look at, with corporate-tax outflows set to add to the liquidity tightness,” Namrata Padhye, a fixed-income strategist at Mumbai-based primary dealer IDBI Gilts, said in an interview yesterday.
Bond returns
India’s three-month Treasury bill yields have more than doubled to 7.16 per cent this year as RBI lifted borrowing costs by 150 bps, the most by any central bank in Asia, data compiled by Bloomberg show. The comparable measure climbed 14 bps to 10.66 per cent in Brazil and eight bps to 0.12 per cent in the US. The rate on similar notes from the People’s Bank of China rose 115 bps to 2.96 per cent.
The difference in yields between India’s debt due in a decade and similar-maturity US treasuries was 477 bps yesterday, compared with 372 at the start of the year.
India’s bonds have returned 4.1 per cent this year, the fourth-worst performance among 10 local-currency debt markets tracked by HSBC Holdings. Investors in Indonesia’s debt assets earned 22.4 per cent, the most in the region, according to Europe’s largest bank.
The rupee, which has appreciated three per cent this year, dropped 0.2 per cent yesterday to 45.14 a dollar, according to data compiled by Bloomberg.
Fiscal deficit
The cost of protecting the debt of State Bank of India, which some investors perceive as a proxy for the nation, has dropped 77 bps from this year’s peak of 239 on optimism the nation will meet its fiscal-deficit target, according to the data provider CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent, should the bank fail to adhere to its debt agreements. One basis point equals $1,000 annually on a contract protecting $10 million of debt.