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| The last quarter (July-September) witnessed some record numbers - forex reserves at $89 billion as on September 29; trading volumes of Rs 14 billion in government securities (G-Secs) in the National Stock Exchange's wholesale debt market segment on August 25; and the biggest single-day open market sale of Rs 120 billion securities by the RBI on August 14.
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| Besides, the RBI announced a 50-basis-point cut in repo rate to 4.50 per cent on August 23. The debt markets faced a period of consolidation after the sustained bull phase for over two years.
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| Some market players squared off positions cutting duration exposures while others chose to stay aggressively pegged at the longer end of the maturity spectrum.
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| Though most players do not see any major reversal, there is a feeling of slowdown in the pace of drop in yields and range-bound markets, going forward.
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| The softer interest rate bias would continue buoyed by the liquidity in the system. The sustained recovery witnessed across the board, resulting in corporate expansions and credit off-take would result in a reversal in yields.
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| However, the worry that there may not be much of a further downside to yields has already started to show with many corporates and banks coming out with debt issuances in the past one month.
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| The corporate issuances of about Rs 10,000 crore, including a public issue for Rs 600 crore, show that corporate bonds are back in action.
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| The external commercial borrowing (ECB) route has been tightened up for corporates and this would further accentuate the domestic borrowings of some corporates.
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| This would be the ideal time for corporate debt issuers to look at floating-rate bonds instead of the traditional fixed-coupon bonds. With an uncertainty on the bottom levels of interest rates, an issuer would benefit by issuing floaters in the current scenario.
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| This way his current borrowings could be at effectively lower levels of interest in case yields drop further while investors can avail themselves of higher coupon cash flows if interest rates turn up.
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| The current economic situation is one of excess liquidity, infused by increasing forex reserves. Globally, most Asian countries have made all out efforts to keep their exports competitive.
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| In an attempt to do so they have been artificially depreciating their currencies by continuously purchasing the dollar.
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| While this has led to burgeoning forex reserves, it has infused huge liquidity into the system. When such excess money is not deployed to result in a further pickup in economic activities, it could stoke inflation, which in turn would result in a rise in yield.
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| Otherwise in an economy where credit demand does not pickup, the central bank adopts liquidity sterilisation methods like open market sales and ad-hoc treasury bill conversions. These measures would, however, be of temporary nature.
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| This is typically the current scenario in the Indian economy.
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| Our forex reserves have gone up from $54 billion in March 2002 to $75 billion in March 2003. This has further spiraled to $89 billion as on September 29, 2003.
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| Managing such huge liquidity has been a major task for the RBI and with credit demand not picking up in a similar pace, any liquidity adjustment measure seems temporary and liquidity is likely to force yields down.
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| Though there is credit demand now, it is marginal and at the retail which cannot essentially dent or absorb the surplus liquidity in the economy.
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| It would require massive infrastructure investment projects to utilise such liquidity levels. This would lead to a pickup in employment and better purchasing power in the hands of the common man.
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| Also, any infrastructural activity would trigger growth of affiliate industrial sectors like cement, steel, etc. This could help in spurring demand and leading to credit expansions while it would heighten the rate of economic growth.
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| In the near term, liquidity in the system, backed by low credit off-take, would continue to keep the interest rates benign and debt markets positive.
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| The auction calendar for government borrowings for the second half has shown reduced borrowing and this would keep up the liquidity levels.
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| With the stock markets showing current gains and momentum, portfolio allocations are likely to shift to equity. In the medium term, the credit policy, accretion to forex reserves, oil prices and the inflation would affect the domestic debt markets.
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| Extra-ordinary gains
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| An analysis of benchmark G-Secs for the last quarter shows that the 11.99 per cent 2009 paper and the 6.25 per cent 2018 paper had delivered phenomenal returns in August.
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| Reliance Capital invested in 11.99 per cent 2009 in July and, hence, benefited from the move. Tata Mutual Fund and Chola Mutual Fund picked up the paper during August.
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| Similarly, Birla SunLife, DSP Merrill Lynch and UTI Mutual benefited because of their investments in 6.25 per cent 2018.
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