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Banks Trapped As Gilts Plunge

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Rohit Rao BSCAL
Last Updated : Mar 06 1997 | 12:00 AM IST

Several banks were trapped in the arbitraging game of funding assets through overnight borrowings as gilts prices slid yesterday. The inter-bank call money market tightened as banks borrowed in calls to participate in repos auction of the Reserve Bank - another arbitraging avenue.

Calls firmed up to around 3.5 per cent as against a low of 2.5 per cent on Tuesday. Lenders emerging as borrowers pushed the perennial borrowing banks to avail funds at a higher rate.

Moreover, this triggered selloff in gilts and a technical correction to the over-bought market was seen. The fall in securities prices was prominent in the 12 per cent government stock (1999) the paper nose dived to Rs 100.08, an overnight loss of 8 paise.

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Banks entered into value dated transactions in gilts and built huge positions during the past few days as overnight cost of funds was at an average of less than three per cent.

However, Reserve Banks presence in the money market through its open market operations window put breaks on the rising gilt prices. Bank treasury officials point out that worst-hit government paper yesterday was the 12 per cent stock maturing in 1999. The RBI had put the paper on its sale window on February 28 at Rs 100.02 on February 28 amongst other papers, but withdrew the same on March 3. This sent a price signal to the market and the rising security prices saw a reversal.

Forward trading and short selling in government securities is banned by the RBI. However, banks enter into value dated transactions amongst themselves. This means that a bank cannot sell a government security without having one.

Banks fund government securities trading operations as returns are assured in the region of 11 to 13 per cent on the accrued interest, that is, the coupon. This gives a minimum spread of 7 to 8 per cent even if the call rates are low.

A treasury head of a south based nationalized bank said banks do enter into value dated sell transactions even if they do not have the particular paper in its portfolio.

This is the trading risk the bank is taking and treasury profitability over a period has to be seen and not isolated profit/losses of a particular transaction.

A senior official of a Mumbai-based nationalised bank said that banks enter into value sale transactions even if the particular paper is not in the portfolio.

Treasury officials sell the paper with an intention of squaring the transaction or making good the delivery by buying it at lower levels at the end of the day, he said.

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First Published: Mar 06 1997 | 12:00 AM IST

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