Liquidity Keeps Gilt Yields Under Check
Easy liquidity has lead to government paper yields falling sharply during the current fiscal, reversing the trend seen last fiscal. The yield of the benchmark 10-year paper came down by more than 225 basis points to 8.05 per cent by end-2001 against a 50 basis point rise last year.
At one point, the yield had dropped by over 350 basis points to 7.76 per cent, but it bounced back to over 8 per cent during the last fortnight of 2001.
The yield remained unidirectional till very recently on the back of ample liquidity and the apex bank's bias for softer rates.
Yields of the 10-year paper, which was around 11.50 per cent in January 2001, fell below the 10 per cent mark in the last week of June.
The relentless fall continued -- barring a few blips in the aftermath of the September 11 terror attacks on the US - with yield touching an all-time low of 7.76 per cent on December 4.
The Reserve Bank's intervention through open market operations, however, propped up the yield to over 8 per cent. This was done to protect the bottomline of banks. Very low yields can scale the return on investments for banks to below their cost of deposits.
Yields rose afresh after the December 13 attack on the Indian Parliament and the resultant build-up of tension along the India-Pakistan border. On December 29, yield stood at 8.05 per cent.
Ample liquidity in the system was largely due to low non-food credit offtake, which on a year-on-year basis till December 14 stood at just Rs 48,300 crore compared with Rs 71,745 crore in the corresponding period last year.
On the other hand, year-on-year deposit mobilisation till December 14 was marginally lower at Rs 1,00,010 crore compared with Rs 1,08,239 crore logged during the corresponding period of 2000.
Devoid of lending opportunities, banks invested money in government securities. The incremental year-on-year investment made by the Indian banking sector in gilts till December 14 stood at Rs 59,510 crore compared with Rs 46,664 crore, previously.
At present, there is ample liquidity in the market but industrial production is showing almost no sign of improvement. Moreover, the apex bank is unlikely to hike the bank rate in the near future with industrial growth remaining weak. In a situation like this, the new year should start with a downward bias in government paper yields.