 "Banks left with little scope for portfolio shuffling to cut losses")
With banks shifting most of their government securities from the available-for-sale (AFS) to the held-to-maturity (HTM) bucket post-July under the Reserve Bank of India (RBI)’s special dispensation, they have very little scope for shuffling portfolio at the beginning of the new financial year. This could lead to banks taking a hit on securities in the AFS portfolio in the first quarter of the current financial year.
To arrest sharp volatility of the rupee against the dollar, the RBI in July had raised the marginal standing facility (MSF) rate 300 basis points above the repo rate and had capped borrowing by banks from the liquidity adjustment facility (LAF) window.
The move had resulted in bond yields moving up sharply. In August, banks were allowed to transfer statutory liquidity ratio (SLR) securities to the HTM category from AFS/held-for-trading (HFT) categories up to a limit of 24.5 per cent as a one-time measure by the RBI at the closing prices of July 15.
Meanwhile, the yield on the 10-year benchmark government bond (8.83 per cent, 2023) breached the nine per cent mark earlier this month and it ended at a four-month high of 9.10 per cent on Monday. However, the yield ended at nine per cent compared with previous close of 9.03 per cent.
A senior treasury executive with State Bank of India said the amount of stocks that could be available for reshuffle in the early months would be low. Banks used the special dispensation given last year to move securities to HTM with July reference price to minimise the effect of volatility during upheavals in money and bond markets. Now, we will look at moving high yielding bonds from HTM to AFS during current season,” he said.
The RBI is auctioning government bonds every week. Currently, banks have very less appetite for bonds. The wait is now for improvement in sentiments in the bond market. “If a stable government comes to power, the situation will improve. That would have some positive impact even on the bond market due to which we hope at the end of the quarter, the yields will be lower than current level,” said a government bond dealer with a state-run bank.
To arrest sharp volatility of the rupee against the dollar, the RBI in July had raised the marginal standing facility (MSF) rate 300 basis points above the repo rate and had capped borrowing by banks from the liquidity adjustment facility (LAF) window.
The move had resulted in bond yields moving up sharply. In August, banks were allowed to transfer statutory liquidity ratio (SLR) securities to the HTM category from AFS/held-for-trading (HFT) categories up to a limit of 24.5 per cent as a one-time measure by the RBI at the closing prices of July 15.
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“At that time, banks used this facility to make a majority of the shift to HTM due to which the scope is now limited. We typically do such shifts at the beginning of every financial year, but this time due to lesser scope, rising yields will hurt,” said the head of treasury of a large public sector bank.
Meanwhile, the yield on the 10-year benchmark government bond (8.83 per cent, 2023) breached the nine per cent mark earlier this month and it ended at a four-month high of 9.10 per cent on Monday. However, the yield ended at nine per cent compared with previous close of 9.03 per cent.
A senior treasury executive with State Bank of India said the amount of stocks that could be available for reshuffle in the early months would be low. Banks used the special dispensation given last year to move securities to HTM with July reference price to minimise the effect of volatility during upheavals in money and bond markets. Now, we will look at moving high yielding bonds from HTM to AFS during current season,” he said.
The RBI is auctioning government bonds every week. Currently, banks have very less appetite for bonds. The wait is now for improvement in sentiments in the bond market. “If a stable government comes to power, the situation will improve. That would have some positive impact even on the bond market due to which we hope at the end of the quarter, the yields will be lower than current level,” said a government bond dealer with a state-run bank.