Rate Flux Turns Pnb Gilts Into An Aggressive Trader

The New Delhi-headquartered primary dealer (PD), PNB Gilts Ltd, has adopted a strategy of aggressive buying and selling of government securities so that at the end of each trading day it carries on its books only a conservative portfolio of the gilts.

The possibility of adverse movements in interest rates have prompted it to take this step.

The PD feels that there could be pressure on the rates, notwithstanding the fact that the inflation is currently ruling low at around 3 per cent and the rupee is stable, in the money markets as the twin-effects of government borrowing surpassing the budgeted limits and credit pick-up happening in the remaining four months of the financial year could exert overall upward pressure on the interest rates.

 

"The thin margins that we are getting from active trading is compensated for by our increased turnover (buying and selling) in the market. Also as a risk mitigation step PNB Gilts is keeping its day end book as lean as possible. With yield-to-maturities (YTMs) in G-Sec market more or less bottoming out our moves are aimed at hedging against any upward movement in interest rates," Arun Kaul, managing director, said.

In the half-year ended September 30, 2001 the PD recorded a turnover of Rs 50,245 crore as against a turnover of Rs 33,305 crore in the whole of 2001-02. The increased turnover reflected in an improved trading income in the half-year ended September 30, 2001 of Rs 44.13 crore (Rs 21.78 crore in whole of fiscal 2000-01). However, falling yields showed up in that interest income in the reporting H1 was at Rs 59.36 crore (Rs 200.41 crore in fiscal 2000-01).

The PD has managed to bring down its leverage to within two to three times its owned funds of Rs 359 crore as against 10 to 12 times of its net owned funds a couple of years back, Kaul said.

On an average it daily borrows almost 56 per cent of its resource requirements from the call money market while the balance is by way of RBI refinance and ICD (22 per cent each).

He pointed out that banks faced a tough choice as on the one hand they were saddled with huge deposits while on the other there were no good avenues for investments.

The banks' will be required to slash deposit rates to protect their spreads as their overall cost of deposits on an average works out to nine per cent while government securities were offering returns no better than eight per cent.