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Bankers see move to bring down rates

BS Banking Bureau

What do one-day money, three-month money and one-year money have in common? Well, they have an identical cost structure. In fact, three-month money and one-year money have become cheaper than one-day money. Welcome to the convergence of rates across the maturity spectrum in the Indian financial world.

On Saturday, the secondary market yield of a one-year government paper (maturing in October 2002) dropped to 6.34 per cent. The primary market yield of a 364-day treasury bill early last week was fixed at 6.49 per cent. The yield of 91-day treasury bill in the secondary market is now hovering around 6.45 per cent. This is happening at a time when the one-day repo rate, which also acts as a floor rate for overnight call money, is pegged at 6.50 per cent.

"This is pure madness. I have never seen this kind of an inverted yield curve in my 30-year-old career," said the treasury head of a large public sector bank. The driving factor is the liquidity overhang in the system.

Reserve Bank of India Governor Bimal Jalan's repeated statements that he is happy with low bond rates are also a contributing factor to the southward movement of government security yields, feel bankers. The benchmark 10-year paper yield dropped to 7.34 per cent on Friday, losing a full three percentage points during the fiscal.

Most of the bankers contacted by Business Standard over the weekend feel this is an orchestrated movement to drive down interest rates in the run-up to the budget. Even though the RBI has not tinkered with the one-day repo rate as yet - it has been kept unchanged at 6.50 per cent since May 29 last year - the banking community feels that a repo rate cut is in the offing even though the RBI may shy from cutting the benchmark bank rate.

"Finance Minister Yashwant Sinha is expected to rationalise the small savings rate structure in his Budget and the RBI may reciprocate by paring the repo rate. Considering the general interest rate trend, the one-day repo rate has been kept artificially high," said a banker.

Despite the low interest rates, corporate India is still in slumber and there is no hurry to mop up money. "The corporates are still shying from borrowing funds. Only a few companies are in the bond market. They are raising money to replace old high-cost debt. There is no demand for fresh loans," said the CEO of a private bank.

In the absence of credit offtake and new government paper in the market, too many banks are chasing too few old papers in the secondary market. The race for picking up government paper has been intensified by ICICI which wants to raise Rs 180 billion worth of statutory liquidity ratio securities - and LIC - which plans to invest Rs 20 billion in government paper by March end.

"What we are witnessing is a set of papers changing hands fast, and banks making money by holding on to certain securities even for a few hours," said a treasury manager. The mad rush for government paper is triggered by the fact that they are zero-risk assets and in a falling interest rate scenario, banks will not be required to provide for depreciation at the end of the year.

With the inflation rate dipping to a new low every week and real interest rates still high, there seems to be a consensus among senior bankers that the rates are bound to come down after the Budget.

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