CBoT prefers bank deposits, corp bonds to gilts

The Central Board of Trustees (CBoT), the country's biggest provident fund, is unlikely to step up investments in government bonds in the remaining part of 2005-06 because bank deposits and corporate bonds are proving to be attractive alternatives, dealers said.

"Banks' term deposits are giving a good return of around 7.75 per cent annually. Also, there are some primary (corporate bond) issues that offer good investment avenues," said State Bank of India Deputy General Manager Chandra Mohan Pillai, who handles investments for the CBoT.

"Most provident funds are investing in deposits of mainly nationalised banks because they are offering a return equal to returns offered by the 10-year bonds," said a dealer at a gilt brokerage firm.

One-year bulk deposit of a state-owned bank is roughly around 7.80-8.00 per cent compared with 7.31 per cent on a 10-year gilt now.

An official said the CBoT invested around Rs 20 crore in the government securities market so far in February, only a fraction of what it invested last year.

Investments in public sector companies' bonds and bank fixed deposits together are roughly around Rs 3,800 crore so far this month compared with Rs around 2,900 crore last year.

The provident fund was said to have recently invested in debt issues of Housing Development Finance Corp and ICICI Bank.

ICICI Bank recently issued 10-year bonds at 8.15 per cent and HDFC issued 11-year bonds at 8.00 per cent.

The CBoT invested around Rs 2,000-2,500 crore in the last few days in the gilt market to meet its statutory requirements, the official said.

Typically, provident fund investments in debt instruments pick up in the last quarter of the year. This is because of the big inflow from interests on special deposit schemes (SDS) in the first week of January, dealers said.

"The total corpus size of the SDS inflow is around Rs 9,000 crore of which almost 50-60 per cent goes to CBoT and Coal Miners, the biggest players in the market. The rest gets divided among other players," the dealer said.

As per revised labour ministry norms on investments, 25 per cent of the total portfolio of provident funds should be in central government securities, 15 per cent in state development loans and central government guaranteed loans together.

Provident funds can invest 25 per cent in the public sector units' debt instruments and 5 per cent in shares of rated companies, which is considered as an optional investment.

The balance 30 per cent is kept for investment in central government securities, state development loans, or public sector debt instruments.

However, the new norms are not applicable to the CBoT because the company has yet to receive the gazette notification from the ministry of labour.

Under the old norms, at least 25 per cent of the total portfolio of the CBoT must be in central government securities, 15 per cent in state development loans and central government guaranteed loans together and 30 per cent in public sector units' debt instruments.

The balance 30 per cent can be deployed in any of the three categories.