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Bank deposit growth lifts bond demand

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Banks have added  Rs3.74 lakh crore in deposits in March 2013 to boost their balance sheets for the fiscal year. This strong deposit growth saw banks’ demand for government bonds go up in April bond auctions as banks have to maintain a minimum of 23% statutory liquidity ratio (SLR) on their net demand and time liabilities (NDTL). Banks need to purchase  Rs86,000 crore of government bonds to cover for SLR for the March deposit growth. Even if banks are maintaining SLR at higher levels at over 25% of NDTL, the surge in March deposits is inducing banks to bid aggressively in bond auctions to cover SLR.

The second government bond auction of fiscal 2013-14 for  Rs15,000 crore held on April 12 saw bids amounting to over Rs 65,000 crore as banks rushed to fill their books. The Rs 15,000 crore bond auction held on April 5 saw bids amounting to Rs 60,000 crore.

The heavy demand for the bonds in the auctions has brought down bond yields across the curve.

Bond yields have fallen 10 bps to 13 bps across the curve since the beginning of the month on the back of demand for bonds by banks. Bond yields have dropped despite market worries of many current on-the-run bonds going off the run as the government introduces new benchmark bonds.

The current on-the-run bonds of 8.07% 2017, 8.15% 2022, 8.20% 2025, 8.33% 2026 and 8.97% 2030 are just a couple of more auctions away from reaching their full outstanding limits of  Rs 80,000 crore imposed by the Reserve Bank of India.

Bonds going off the run will see liquidity drying up as new bonds become the market favourites.

However, the government has indicated that new benchmark bonds would be issued in May, giving markets more time to trade the current benchmark bonds.

Banks will continue to bid heavily in the next few auctions as they look to shore up their bond holdings. The fact that traders were sitting on the fence at the beginning of this month on worries of auction supply is contributing to the demand for bonds in the auctions. Trader books were light, and with bond yields trending down traders are being forced to fill up their books on worries of being left out of the rally. Banks are competing with traders for bonds in the auctions leading to bids becoming aggressive amidst heavy demand.

Parthasarathy is editor of  www.investorsareidiots.com, a website for investors

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