Bonds remained firm during the week supported by slumping oil prices and large foreign exchange inflows.

Bankers said that what also supported the market was the anticipation that the Government would meet or even surpass the fiscal targets for the current year.

The fiscal deficit estimated for the current year is 3.8 per cent of the gross domestic product. Direct tax receipts for the first half of the year was at least 41 per cent more than last year and at least Rs 30,000 crore more than the target estimated for the current year. Gross direct tax receipts during the period was Rs 2.11 lakh crore. If this tax buoyancy continued through the year, expectations are that Government borrowings would be pared down from the current level of Rs 63,000 crore for the second half.

Moreover, bankers said that oil companies have scaled down drawals from credit lines as a result of lower oil prices. The weighted average import price for domestic oil companies is now likely to be under $55 a barrelBut oil companies are not taking chances, especially private sector refineries, which have begun taking forward cover and are attempting to lock into current prices. This was now beginning to impact forward premia that has moved up to 1.5 per cent between one and 12 months.

Capital goods importers are also hedging for their requirements. The forward cover was also driven by expectations that some of the foreign institutional investors arelikely to begin divesting ahead of their annual closing of accounts.

Credit off-take up

Besides, bankers said that credit off take, particularly retail and farm credit, had improved during the week. At the weekly liquidity adjustment facility auction, the mop-up through reverse repurchase was Rs 18,275 crore, down from the previous week's figure of close to Rs 30,000 crore. What also contributed to the slightly tight liquidity were the twin Government security auctions for Rs 9,000 crore. The bids for the auction were in excess of Rs 17,000 crore. But trends at the auctions indicated stability at current levels. The 7.59 10-year paper was placed at 7.63 per cent and the 30-year 8.33 paper was placed at 8.10 per cent. At the weekly T-Bill auctions, the cut-off and weighted average yields was 6.60 per cent and the 364-day T-Bill yield was 6.91 per cent.

Signifying the stability, the 10-year yield to maturity ended last week at 7.61 per cent on a weighted average basis, almost unchanged from the last week's 7.62 per cent.

Trade volumes stagnant

Daily trade volumes were stagnant at Rs 1,500 crore last week. But the outlook remained firm. This was evident from the thin bid-offer spreads, barely five basis points. Similarly, the inter-yield spreads remained narrow. The spread between one and 30 years was barely 115 basis points, indicating a flattening yield curve. Bankers said that this was largely on account of purchases by many of the banks and insurance companies of long dated securities. Most of the banks were purchasing long-dated securities hoping to book treasury profits anticipating a further softening of yields. Bankers were making the purchases in marked to market baskets. Insurers' purchases were mostly of securities above 10 years.

Ratings upgrade?

The bullish outlook for bonds was also driven by expectations of an upgrade in India's sovereign rating by the international rating agencies.

India is still one notch below the investment grade. Said Dun & Bradstreet India, Chief Executive Officer, Dr Manoj Vaish, "We can expect an upgrade to happen soon." This would translate into a reduced risk premium for India and greater capital inflows.

The flip side, however, was credit off-take. The incremental credit-deposit ratio remained close to 100 per cent. This was despite the large deposit inflows into the banking system, mostly time deposits. On a fortnightly basis, the increase in time deposits was Rs 31,413 crore. This was largely on account of the competitive rates being offered by both public and private sector banks across all maturities.

C. Shivkumar