ICICI Securities and Finance Company (I-Sec) has projected a net gain of Rs 3,360 crore from commercial banks on account of the fall in the yields of government securities.
Even though banks will incur a loss of Rs 123 crore on securities acquired in 1997-98, I-Sec predicts a net gain Rs 3,360 due to marking to market (MTM) the banks investment portfolio.
In the current financial year, banks have subscribed to Rs 23,508 crore f government securities at a coupon rates ranging from 13.05 per cent to 10.85 per cent. The weighted average of coupon rates is 11.84 per cent and the weighted average price value per basis point of these securities is 4.04. However going by the yield curve indicated by RBI through its open market operations offer prices, banks will need to provide for a small amount of depreciation on securities acquired this year. The rise in yields for these securities is expected to be around 13 basis points.
The rise in depreciation is going to be offset by the huge MTM gains on the existing portfolio of Rs 3483 crore. However profits from appreciation of these asset prices can be shown only if these securities are sold by banks. This could be one of the reasons for the distinct shift in trading activity from low coupon stocks to high coupon ones such as 13,7 1999 and 14 per cent 2005 after the January tightening since selling these would enable banks to book profits for the year.
Meanwhile for the fortnight ending March 29, 1998, there will be a net outflow of Rs 5100 crore over the next fortnight, I-Sec says. However, this amount could change significantly depending on the extent of outflow on account of VDIS. Tax liability under the total VDIS declaration stands at Rs 10,550 crore of which the amount actually collected before December 31, 1998 is Rs 5,500 to 6000 crore. Given the steep interest rate of two per cent per month, a large part of the difference is likely to have already been paid and hence the fairly low assumption of Rs 1000 crore for the second fortnight.
The expected tightening in the last fortnight of 1997-98 will put a downward pressure on prices of government securities and treasury bills, though volumes are expected to decline further since most market participants would prefer to wait for the new finance year before extending commitments. The next fortnight provides just the right opportunity to increase exposure to October maturity treasury bills or 1999/2000 maturity assets at attractive yields.
