)
The Reserve Bank of India (RBI) might keep key liquidity ratios unchanged in next week's monetary policy review, to smoothen the government's borrowing for the second half of the financial year.
The latter plan (October-March) is likely to be issued later this week. With the announcement of a borrowing calendar, a supply of bonds shall continue every week. Experts say in such a scenario, if RBI also cuts the statutory liquidity ratio (SLR) and held-to-maturity (HTM) limits, there would be concerns that banks might sell illiquid securities in the market.
In the August review, RBI had cut the SLR by 50 basis points (bps) to 22 per cent of banks' net demand and time liabilities (NDTL). RBI had also reduced the total holdings of SLR securities in the HTM category by 50 bps, to 24 per cent of NDTL.
SLR is the minimum bond holding requirement for banks as prescribed by RBI. RBI has on many occasions said this would be brought down.
“Already, SLR has been brought down. In the time to come, it might be reduced to 20 per cent. The government borrowing calendar for the second half will be announced just before the review and an SLR cut will have a negative impact on the market,” said Ashutosh Khajuria, president (treasury), Federal Bank.
The central government borrowing in the second half of 2014-15 is seen at Rs 2.48 lakh crore.
According to Manish Wadhawan, head of interest rates at HSBC India, the SLR might by March 2015 be brought down to 20 per cent. “By then, the overall implications of Liquidity Coverage Ratio (LCR) norms will be in place. Currently, the banking system holds excess SLR to the extent of 7.5 per cent but the distribution of this excess among banks is the key. On the industry level, because the LCR norms have to be adhered to, RBI is trying to assess how the banking system will evolve with these norms,” said Wadhawan.
LCR is the proportion of high-quality liquid assets to the total net cash outflows through 30 calendar days. RBI has mandated banks to maintain a 60 per cent LCR from January 1, 2015. It has also suggested the ratio be increased to 100 per cent by January 1, 2019, in a phased manner.
P Sitaram, chief financial officer at IDBI Bank, said after the policy announcement, he does not foresee a major impact on the bond market. "This is because no major rate trigger is expected and no real action is likely to be seen in the monetary policy," he said.
The yields on the 10-year benchmark bond ended at 8.47 per cent on Tuesday, compared with Monday's close of 8.44 per cent. Bond traders see the yield on the 10-year bond trading in the range of 8.4-8.5 per cent this week.
