PFC defers bond issue on cash crunch

MONEY MARKET ROUND-UP

Tight liquidity after the CRR hike forced public sector undertaking Power Finance Corporation (PFC) to defer its bond issue for raising funds to the next week.

According to dealers, the five-year, triple-A-rated bond of PFC offered a rate 9.35 per cent, whereas the market players expected 9.45-9.50 per cent.

Other long-term bond issuers were waiting to assess the liquidity situation and its impact on interest rates before entering the bond market for funds. After a rush on Monday, not may certificates of deposits (CDs) were launched on Tuesday.

 

Tight liquidity pushed rates in the overnight interest rate swap (OIS) market, where banks strike deals to protect interest rate liabilities. Since liquidity is tight, which, in turn, could push interest rates up, banks struck deals, wherein they paid a fixed rate of interest and received interest in floating rates.

OIS rates in the three-month segment moved up from 7.15 per cent to 7.27 per cent, whereas the highly traded segment of the one-year maturity witnessed yields going up from 7.20 per cent to 7.26 per cent.

G-sec: Prices dip

Apprehension of liquidity drying up led to a selling pressure in the government securities (G-sec) market. Prices of government securities across maturities fell by 20-30 paise.

The yield on the benchmark ten-year paper 8.24 per cent 2017 closed at 7.85 per cent as against a close of 7.79 per cent on Monday. However, the long-term benchmark paper 8.33 per cent 2036 closed at par at 8.33 per cent.

Even if the market reeled under fear of tight liquidity in the medium term, a number of coupon redemptions of government securities eased the sentiment in the very short term.

The market is expecting a cut-off yield on the 91- and 182-day T-bills on Wednesday to rule around similar levels as was seen last week rather than inching up.

Liquidity: Tight supply

Liquidity in the market appears to be drying up since the Reserve Bank of India (RBI) absorbed only around Rs 2,430 crore under the reverse repo mechanism. Reverse repo is the mechanism through which RBI absorbs excess funds from the system.

Liquidity has started drying up after two tranches of hike in the cash reserve ratio (CRR) and auction of government securities both as a part of borrowing programme and the Market Stabilisation Scheme (MSS) to suck out surplus liquidity.

RBI had hiked CRR by two tranches of 25 basis points each on April 17, with the second tranche coming into effect on May 9. CRR is a portion of banks' total deposit mobilisation over a fortnight that is kept with RBI as a statutory requirement.

Call rates, at which banks lend and borrow funds from each other, hit a high of 6.40 per cent.

Mutual funds were wary of redemption and rates in the collateralised borrowing and lending obligation market (CBLO) also inched up to 6.11 per cent.