Moody's downgrade of SBI triggers bond price correction

Bonds prices corrected on the back of bank and fund buying as traders weighted the possibility of a pause in policy rate hikes by the Re serve Bank of India.

The purchases took up the price of the 10-year 7.8 per cent coupon security due in 2021 to Rs 95.48 (par value Rs 100) or a yield of 8.50 per cent.

Intra-week, the security had hit a low of 8.55 per cent (Rs 95.18). Traders said the re covery was prompted largely by provident funds purchas es. Although provident fund elevated bonds, yields were still at six basis points off the previous week's 8.44 per cent (Rs 95.86).

The drop in bonds was partly triggered by global rat ing agency Moody's down grade of the State Bank of India. The downgrade roiled domestic financial markets and triggered a sharp upward momentum in sovereign bond yields. But Punjab National Bank chairman and managing director KR Kamat said, “Yields will not go up significantly in the future unless there is an increase in credit offtake.“

But markets remained on tenterhooks as fears of a build of non-performing assets mounted. The fear was amplified by a Crisil report that more downgrades are likely over the next few weeks. Crisil in its rating action report said, “Signs of demand moderation are visible. Our analysis reveals that 10 of the top 20 industries (in terms of loans outstanding of the Indian banking system) are showing clear signs of slowdown in growth.“ The demand mod eration would bring down the interest cover ratio (measures sufficiency of an entity's operating profitability in servicing interest on borrowings) of the corporate portfolio is estimated to de cline to 3.5 times in 2011-12 from 4.8 times in 2010-11.

Traders said fear was also Pinaki Paul reflected in Moody's analy sis. Moody's analyst Atsi Sheth speaking to Financial Chronicle from New York said, “NPL 's can lag a growth slowdown. Therefore, it will be watched closely by us.“ That would imply that more public sector banks in the country could face downgrades. Rating agencies have virtually reaffirmed credit risks by downgrading large British banks including the respected Lloyds bank.“

The bottomline pressures were reflected at the Rs 15,000-crore government borrowing auctions. Bids at the auctions auction were just 1.8 times more than the offered amount. The average bids for the entire year was 2.27 times, for the first half borrowing of Rs 2.5 lakh crore. Traders said that some bids made under the current regime of uniform price method (see box) were far too low, indicating very high yields. As a result, at the auction, the price of the 8.08 per cent security falling due in 2022, was Rs 95.68 (8.7 per cent yield). But usually in the uniform price method, the highest price bid (lowest yield) is accepted that becomes the reserve price.

Bids lower than the reserve prices are rejected and consequently devolve on to the underwriters. At last Friday's government security auction this happened in the case of the long dated security, the 8.28 per cent falling due 2027. This security devolved to the extent of Rs 192.53 crore on to primary dealers.

High yields at the auctions were despite the liquidity build-up in the banking system. At the weekend liquidity adjustment facility auctions, it was banks that were parking funds with the RBI. At the weekend auctions banks parked Rs 19,310 crore with the RBI or reverse repurchase at an interest of 7.25 per cent.