Transaction tax scares gilts, rupee oscillates

RECAP

The bond markets virtually came to grinding halt on Friday last week in sharp reaction to the imposition of the transaction tax of 0.15 per cent on all purchases of exchange-traded securities.

Stray deals were struck on Friday, but volumes were negligible as dealers shunned trade. Only a handful of bond deals were reported, most very small, and traders expected volumes by the end of the day would be nothing close to daily average, with brokers absent from the market. Turnover took a severe beating, declining to around Rs 300-400 crore as against the usual daily volume of Rs 3,000-4,000 crore.

Dealers, in their effort to drive the market, used the negotiated dealing system (NDS), which regulated by RBI.

The sources said bond brokers under the umbrella of fixed-income brokers' association will be meeting the finance ministry this week over the issue of transaction tax. The relatively thin corporate bond market saw no deals at all so far, dealers said.

The bond markets were never hit like this before, except when the corporate bonds market suffered a blow in 2003 when the Securities and Exchange Board of India and Reserve Bank of India issued joint guidelines on curbs over private placement deals.

Meanwhile, the headline inflation rate showed up at 6.09 per cent for the week ended June 26, 12 basis point higher than 5.87 per cent the week before. However, it failed to impact the market as there were no major deals happening in the market.

The yield on the ten-year benchmark paper, 7.37 per cent 2014, closed at 5.86 per cent on Friday, unchanged from Thursday close.

Majority of deals in the bond markets happened between banks and mutual funds in highly-liquid gilts and treasury bills, in which the market is aware of the quotes, and some floating-rate bonds.

Taking the advantage of the illiquid market, some traders dealt illiquid papers like 12 per cent 2008 which was available at rock-bottom prices.

The illiquidity has widened the bid-ask spread to a range of 25 paise to Re 1 as against the usual 5-15 paise even in dull trades. According to dealers, the wide gap is quoted after the market has discounted the 0.15 per cent of transaction tax.

In the foreign exchange market, the rupee appreciated towards the end of the week after the Budget was announced. While a single inflow from a foreign telecom company boosted the rupee by 10-11 paise to close at 45.66/67 after opening at 45.75/76 to a dollar on Friday, the bouts of appreciation started after the budget as the hike in foreign direct investment limits in aviation, insurance and telecom are perceived to be friendly to foreign investors.

The rupee started the week at 45.84/87 but lost to 46.06 during the day due to dollar buying by state-run bank for making defense payments before closing at 46.03 to a dollar.

However, the foreign exchange market have been tracking the equity market for possible movements as dealers feel that there has not been for the market as such to assess.

During the budget, rupee appreciated with the rise of the equity markets and fell correspondingly. This is because the primary concern for the market is the liquidity to propel the foreign exchange market.

Therefore hiking the FDI limits in these sectors and the investments in foreign institutional investor in debt from $1 billion to $1.75 billion have been perceived very positively by the market.

Premiums on forward dollars came off after positive vibes from the Railway Budget, which stayed away from freight rate hike.

Annualised premiums on six-month and one-year closed at 1.15 per cent and 1.1 per cent respectively. Forward premiums eased tracking the spot market with six month and one year dollars closed at 1.31 per cent and 1.24 per cent respectively on Friday.