RBI monetary policy review: Revised HTM cap to aid govt borrowing

The increase in the limit for keeping specified securities in the held-to-maturity (HTM) portfolio from 22 per cent to 23 per cent will provide room for supporting the elevated borrowing programme of the government.

It is also expected to help in softening the blow from hardening bond yields, bankers and analysts said.

Through Friday’s policy announcement, the Reserve Bank of India hiked the limits under HTM until March 2023.

Anil Gupta, vice president and co-group head, ICRA, said the increase in the HTM limit by 1 percentage point could create an additional headroom of Rs 1.6-1.7 trillion for banks.

They can hold government securities without marking them to the market when yields are rising and prevent losses.

This can improve the appetite of banks for government securities and facilitate the large borrowing programme of the central and state governments while moderating the rising yields.

The yield on the 10-year benchmark government bond stood at 7.11 per cent at close, the Clearing Corporation of India data showed.

Dinesh Khara, chairman, State Bank of India, said the announcements to support the borrowing programme were not disruptive.

A K Goel, managing director and chief executive, Punjab National Bank (PNB), said with the increase in statutory liquidity holding in the HTM category by 100 basis points banks would be able to manage their investment portfolio better.

In October 2020, the RBI had increased the limits in the HTM category from 19.5 per cent to 22 per cent of net demand time liabilities (NDTL) in respect of securities eligible for the statutory liquidity ratio (SLR) acquired on or after September 1, 2020.

Banks will be allowed to include eligible SLR securities acquired between April 1, 2022, and March 31, 2023, under this enhanced limit. From Q1FY24, the limit will start being reduced from 23 per cent to 19.5 per cent in a phased manner.

SLR securities in the HTM category should not exceed 22 per cent by end-June 2023, 21 per cent by end-September 2023, 20 per cent by end-December 31, 2023, and 19.50 per cent by end-March 2024.

The hike in limit has come at a time when bond yields are rising, helping to reduce the impact of mark-to-market losses for some parts of the bond portfolio.

Zarin Daruwala, Cluster CEO, India and South Asia markets, Standard Chartered Bank, said this would not only insulate banks’ government securities (Gsecs) portfolios from rising yields, but would contain the fiscal cost by stimulating additional demand for Gsecs.

Referring to the government’s borrowing plan for FY23, the RBI in its monetary report said the Union Budget (2022-23) had placed gross market borrowing at Rs 14.95 trillion, which is 44.2 per cent above that of the previous year.

In the first half (H1F23), the gross market borrowing of the central government through dated securities has been planned at Rs 8.45 trillion.

Given the size of the government borrowing, the absorption of the large supply could remain a challenge, said Gupta of ICRA.

The Centre’s market borrowing programme in 2021-22 remained at elevated levels for the second successive year. Gross borrowing rose from Rs 7.1 trillion in 2019-20 to Rs 12.6 trillion in 2020-21. It was Rs 10.5 billion in 2021-22. The last two years saw a sharp rise in expenditure to manage the pandemic.