Debtly directive

There's a flip side to the RBI move on banks' gilt investments

The Reserve Bank of India's (RBI) decision to allow banks to shift their government securities to the "held to maturity" segment may have helped shore up bank bottomlines, but it has had one unforeseen effect "" banks now have no incentive to trade in these securities. The upshot is that volumes in the debt market have shrunk dramatically.

According to traders, current volumes are a tenth of the Rs 2,000-2,500 crore levels in September, and the lower volumes have resulted in increased volatility.

Of course, it's not just lower volumes that have resulted in bond yields shooting up. Apart from inflationary pressures, exacerbated by the decision to raise domestic fuel prices, and monetary tightening by the RBI, the other main reason for yields to move up has been the steadily increasing credit-deposit ratio.

For the month to October 15, the incremental credit-deposit ratio (after adjusting for the conversion of IDBI into a bank) has been as high as 119 per cent, more than the incremental deposit growth, causing banks to raise resources by selling their investments. This selling pressure on bonds has led to a spike in yields.

The third factor exerting upward pressure on yields lies in the central bank's policy towards the rupee. Earlier, the RBI used to buy up dollars hand over fist, releasing rupees into the market, thus adding to liquidity.

Now, the RBI intervenes less frequently, since a stronger rupee leads to lower prices for imports and thus reduces inflationary pressures. But as a result, liquidity in the money market has suffered.

The combination of higher credit pick-up and rising inflation is a deadly cocktail for the bond markets and the only thing the RBI can do to reduce the pressure is to allow the funds from the stabilisation bonds to come back into the system.

Bongaigaon Refinery

The board of Bongaigaon Refinery & Petrochemicals Ltd (BRPL) has declared an interim dividend of Rs 6 per share, which alone gives it a dividend yield of 5.76 per cent.

The Bongaigaon stock has seen strong investor interest lately, with the stock rising about 23 per cent over the last month, compared with a mere 0.6 per cent increase in BSE's Oil and Gas index.

The reason for the outperformance is simple. Like other refiners, BRPL, is currently enjoying high gross refining margins. But more importantly, unlike the biggies in the refining business like IOC, HPCL and BPCL, BRPL does not have a oil marketing division.

This means it does not have to bear subsidy losses on sales on kerosene, diesel or LPG. Hence the gains from high refining margins flow directly into its bottomline.

Also, as BRPL is located in the north east, it also enjoys an excise exemption of 50 per cent from the government. With petro product prices ruling high, the benefit from the excise exemption has been rather high.

In line with other pure refiners like Kochi Refiners, BRPL reported a considerable improved earnings last quarter "" net profit grew 52 per cent to Rs 160.87 crore, assisted by refinery throughput growing 18 per cent to 0.6 million tonnes as well as GRM improving 116 per cent year-on-year to $9.3 per barrel.

In addition BRPL's petrochemical division also benefited from the marketing synergies derived through its alliance with Reliance Industries Ltd and segment profit rose 29 per cent in the last quarter.

The BRPL stock trades at about 5 times trailing 12-month earnings, at a slight discount even to Chennai Petroleum and Kochi Refineries. The markets fear that the excise benefit may be taken away.

But even if that doesn't happen, and if crude prices were to fall going forward, the benefit from the excise exemption would be lower.

With contributions by Amriteshwar Mathur and Mobis Philipose