Return
to Story Page
To print: Select File and then Print from your
browser's menu
Our Banking Bureau
Mumbai, August 3: A gross inflow of $3 billion through the Resurgent India Bond proceeds -- two-thirds of which is likely to be converted into rupee-- will flush the banking system with funds, resulting in drop in yields, particularly at the short-end of the curve, said a JP Morgan report "India Markets Outlook".
If two-thirds of the expected collection is swapped into rupees, augmentation of resources of SBI and other collecting banks will to the extent of Rs 8,500 crore, equivalent of 1.7 per CRR reduction, stated the report. Since the amount will be employed in funding infrastructure projects, the erosion in surplus liquidity of banks will only be gradual, it said.
"In the interim, we are likely to see a dip in interest rates particularly in short-term maturity assets. The decline in interest rates is, however, likely to be short lived and fresh issuances/open markets sales will cap the price rise in securities, said the report.
A lot would also depend on how much of these inflows are sterilised by Mumbai, August 3: A gross inflow of $3 billion through the Resurgent India Bond proceeds -- two-thirds of which is likely to be converted into rupee-- will flush the banking system with funds, resulting in drop in yields, particularly at the short-end of the curve, said a JP Morgan report "India Markets Outlook".
If two-thirds of the expected collection is swapped into rupees, augmentation of resources of SBI and other collecting banks will to the extent of Rs 8,500 crore, equivalent of 1.7 per CRR reduction, stated the report. Since the amount will be employed in funding infrastructure projects, the erosion in surplus liquidity of banks will only be gradual, it said.
"In the interim, we are likely to see a dip in interest rates particularly in short-term maturity assets. The decline in interest rates is, however, likely to be short lived and fresh issuances/open markets sales will cap the price rise in securities, said the report.
A lot would also depend on how much of these inflows are sterilised bythe Reserve Bank of India. The movement in non-food credit would be the other factor to watch closely, the report added.
Nearly Rs 30,000-crore borrowing is yet to come and with the RBI saddled with about Rs 18,000-crore devolvement, there will be no dearth of government paper, it said.
Though cut-off yields at last weeks bond auctions have been higher than earlier levels, sentiment on the interest rate front has gradually reversed. The estimated net inflow of Rs 3,000 crore over the next month and Rs 5,000-crore plus outstanding amount at fixed rate repos will ensure surplus liquidity conditions throughout August, said the report. Inflation at 8.08 per cent is already 300 basis points higher than in the beginning of the year. Correspondingly, the real interest rates are down by an equivalent amount any improvement in underlying fundamentals. The real interest rates as low as 3 to 4 per cent on government bonds seem unsustainable and it is expected that interest rates may rise again in September, itsaid.
Though a significant portion of government borrowings have been completed, there is no reason to believe that supply of government stock will slow down over the rest of the year and ease interest rates.
According to the report, open-market sales are bound to continue through out the year and the RBI could turn an aggressive seller once the borrowing has been completed.
All security issuances of 1998-99 should be available around or below par levels for most of the year, the report said.
Despite completing a large part of the government borrowings, there are certain issues which need to be addressed, said the report.
First, the RBI has subscribed to Rs 17,705 crore of government issuances so far this year apart from the WMA support of Rs 10,991 crore(as on July 10). This large accommodation of the central government by RBI undermines the effectiveness of its monetary policy and the rapid expansion in reserve money is likely to stoke inflation further.
Secondly, primary dealers as a grouphave subscribed to only 12.5 per cent of the total devolvement. The near lack of support by PDs emphasises the need to expand this network with well-capitalised entities.
Also development of a "when-issued" market and permitting short-selling/ futures in government securities will improve overall secondary market liquidity even in raising interest rate scenario and enable market participants to implement a bearish view with a profit objective.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
------------------------------------------------------------
This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
------------------------------------------------------------