New Delhi: Bonds remained fragile last week on hardening international oil prices and continuing exodus of foreign funds from the domestic equity markets.
Bankers said that oil companies were active in the foreign exchange markets to meet their crude oil import payments.
But, few were taking forward cover. Instead, most of the foreign currency requirements were sourced from the spot markets, they added.
Oil companies were renewing some of their credit lines with the banks. These credit lines were used to source their foreign currency requirements; thereby, drawing out liquidity. Some of the oil companies have, in fact, reworked their credit lines with high oil prices.
However, the major worry for banks is the bottom line impact in a higher interest rate regime.
Bankers have begun feeling queasy over slipping bottom lines in the first quarter results. Besides, their plans to tap the equity markets with follow-on issues are in jeopardy.
With equity markets sinking, cost of tier-one hybrid capital (preference shares/ perpetual bonds) and tier-two subordinated debt has soared. The last few issues were made at rates close to nine per cent.
FIIs exodus
Taders said that insurers including state owned companies were attempting to support the equity markets in the wake of an FII exodus.
Yet their interventions were low octane. This was because FII exodus was expected to continue, ahead of a hike in US interest rates.
The Fed Funds (the interest rate that banks charge each other for the use of Fed funds) is expected to rise by at least 25 basis points from the current level of five per cent.
Along with the insurers, bankers were also on the back foot. This was evident from rising cash balances with the Reserve Bank of India.
PAGE_BREAK
In fact, at the three-day liquidity adjustment facility auctions, the mop-ups through three-day reverse repurchase operations were Rs 40,565 crore. On the face of it, it may appear that there is ample liquidity in the banking systems.
But, bankers admitted, the market liquidity has been created, by choking off other exit points. Incremental credit-deposit ratios of banks have drastically shrunk.
The 100 per cent plus days of incremental credit growth have disappeared. In fact, for the last week, the incremental credit-deposit ratio was just 43 per cent.
Bankers are holding more cash. Incremental cash deposit ratios are 20 per cent. This is way above the prescribed cash reserve ratio of five per cent. However, this component also included the reverse repo mop-ups.
Credit-Off Take
Yet bankers said such a strategy offered a good spreads, on their short-term accretions. Most of their deposit accretions were at the short-end.
These included savings deposits that carried interest of 3.5 per cent and short-term deposits, of up to 46 days that carried interest rates less than 4.25 per cent.
Consequently with reverse repo rates at 5.75 per cent, bankers said the spread was sufficient to ensure their profitability till the peak season credit-off take begins.
The credit-off take is expected to show big increases and deposit rates are likely to be pushed beginning next month onwards. Till then they would prefer to be cash heavy.
Comments
0 comment