Nov. 1, 2009 (The Hindu Business Line) --

C. Shivkumar

The uptick in bond prices (drop in yields) was partly supported by the Reserve Bank of India’s one percentage point hike in the Statutory Liquidity Ratio last week to 25 per cent. Traders said the hike was intended more as a signal against any upward momentum in yields.

But with most banks already overloaded with SLR securities, the impact was unlikely to last long, they added. Banks currently have government securities investment-deposit ratio of close to 33 per cent. SLR is the mandated pre-emption of bank deposits into government securities.

Besides, comments by the RBI Governor also indicated that more interventions are likely at the quarterly review of the monetary policy in January next year. The cues taken were that yields would remain circumscribed. What also powered the financial markets during the week were large non-debt inflows, mostly bunched exporter receipts. On the capital account, foreign institutional investors remained sellers. Net divestments by FIIs last week amounted to $73 .5 million (Rs 369.3 crore). FIIs sold both equity and debt. As a result, the rupee dropped to Rs 46.96 (Rs 46.45) against the dollar.
Forward cover

However, exporters and corporates that had tied external commercial borrowings took forward cover. This pulled down forward premia for one, three, six and 12 months to 2.46 per cent (2.71 per cent), 2.68 per cent (2.71 per cent), 3.02 per cent (3.25 per cent) and 2.97 per cent (3.21 per cent) respectively. Traders said that importers were hardly present in the forward markets. Even the short forward premia — cash to spot — declined to 2.33 per cent (2.36 per cent) respectively.

The fall in the short forward premia was partly due to the imposition of a cash reserve ratio in the collateralised borrowing/lending obligations market where some foreign banks were active. But large falls were prevented in view of the arbitrage opportunities open through the RBI’s reverse repurchase window, where the rate remains at 3.25 per cent.

The Non-Deliverable Forward (NDF — offshore rupee trading where settlement is done in foreign currency, mostly in US dollars) rupee-dollar exchange rate though depreciated to Rs 46.96 (46.52). Even at this level, NDF rate was lower than the domestic one-month forward rate by about 9 paise. But all eyes remain focused on next week’s meeting of the Federal Open Market Committee. The Fed is also expected to begin reversing monetary expansion slowly. The first signs of such an exit became apparent at the FOMC’s August meeting when it decided to slow the purchases of agency mortgage-backed debt.