Public sector banks request RBI on bond portfolios as yields harden

Senior treasury officials of some state-owned banks requested officials from the Reserve Bank of India (RBI) to provide dispensations regarding their bond holdings at an informal meeting on Friday, sources told Business Standard.

The treasury officials requested a further increase in the limits for held-to-maturity (HTM) portfolios for government bonds as well as permission to amortise marked-to-market losses incurred on bond holdings in the current quarter.

Leeway on amortisation would provide banks the room to spread out treasury losses incurred in the first quarter throughout the entire year, giving more elbow room on usage of capital, treasury officials said. The communication by the banks comes after a sharp rise in government bond yields in the ongoing quarter following successive rate hikes by the RBI. Bond yields and prices move inversely, implying marked-to-market losses on gilt portfolios in the event of a rise in yields. “The HTM transfers were made in April as is the usual practice but yields have risen by more than 50 basis points after the surprise rate hike in May,” a source aware of the development said.

“Earlier when the RBI was conducting OMOs it was easy to sell to them but now that they have stopped buying bonds, banks would incur losses in the secondary market. Hence the request is to permit spreading of first quarter losses over the whole year and to further increase the HTM limit,” the source said.

An email sent to the RBI on the matter did not elicit a response at the time of going to press.

At its policy review in April, the RBI had increased the limit on HTM portfolios to 23 per cent of net demand and time liabilities till March 31, 2023. The earlier limit was 22 per cent.

The HTM limits would be restored from 23 per cent to 19.5 per cent in a phased manner starting from the quarter ending June 30, 2023.

Bonds kept in the HTM book do not have to be marked to market and the portfolio hence provides a cushion when yields rise unlike the available-for-sale and held-for-trading books.

Among banks, state-owned banks are the largest holders of government bonds and their participation is crucial for the smooth passage of the Centre’s borrowing programme. The government is scheduled to sell bonds worth Rs 14.3 trillion on a gross basis in the current financial year.

So far in the current quarter, yield on the 10-year benchmark government bond has climbed 63 basis points.

Yield on the 10-year paper closed at 7.47 per cent on Tuesday. On June 16, yield on the bond had shot up to an over-three-year high of 7.62 per cent.

A rise in yield of one basis point on the 10-year paper corresponds to a fall in price of roughly 7 paise.

Following an off-cycle meeting of the Monetary Policy Committee, RBI Governor Shaktikanta Das announced a 40 basis point repo rate hike on May 4. The MPC then went on to raise the repo rate by 50 basis points more to 4.90 per cent at its policy review in early June.