With financial markets being swamped by liquidity, banks and primary dealers are latching onto state government bonds, which offer better returns.
Dealers say that, though these are early days of the new financial year, the interest on the state government paper remains high since the 10-year loans are eligible to be classified as SLR securities. There is good demand from the state-owned banks that face the challenge of deploying money raised through deposits.
They could either keep it in the Held-to-Maturity category or keep it available for sale if it wants to offload bonds. Four state governments raised about Rs 3,777 crore by auctioning 10-year development loans. The cut-off yield for the auction varied between 7.50 per cent and 7.58 per cent.
Though Andhra Pradesh originally planned to raise Rs 800 crore, it raised Rs 200 crore additionally at Rs 1,000 crore. West Bengal raised Rs 2,000 crore, Jharkhand mopped up Rs 517 crore while Nagaland garnered Rs 260 crore.
Last week, two state governments raised Rs 900 crore through development bonds. The cut-off yield for auction was 7.77 per cent. Punjab raked up Rs 600 crore, while Uttarakhand issued bonds worth Rs 300 crore.
The level of market borrowings by state governments was high in March. They raised over Rs 31,000 crore through development bonds. The yields on the paper were over 8.25 per cent then.
A treasury official with State Bank of India said there was huge liquidity in the system. The yield on the central government paper with balance maturity of 10 years is 6.43 per cent. Compared to this, the state bonds offer better yield which is higher by at least 100 basis points.
The Reserve Bank of India today absorbed Rs 1,11,490 crore through reverse repo operation of Liquidity Adjustment Facility (LAF).
RBI infused no amount under LAF repo operation. During this week, the central bank has accepted funds over Rs 1,00,000 crore daily via repo window.
A treasury head of a private bank said, “The way yields are coming falling people are latching on good quality paper which offers a better yields.”
Banks are parking huge amounts with RBI under reverse repo window. There is apprehension that RBI may put a cap on how much bank could put at repo window. So part of buying is driven by this fear as well.
A dealer with private sector bond house said small banks are reported to be lapping up state paper since they have to meet SLR requirement as they have seen increase in their floating deposit base.
