Volatile rates prompt banks to seek purchase window for gilts buyback

Commercial banks have sought the opening of a window by the Reserve Bank of India (RBI) to buy back government securities from the market players in times of interest rate volatility.

The objective is to stem a sharp fall in gilt prices as was seen in the last few weeks.

At a meeting of treasury heads of various banks with the Fixed Income and Money Market dealers' Association (Fimmda) today, bankers were of the view that the purchase window will act as a balancing mechanism for the market similar to the open market operations of the RBI that suck out excess liquidity.

The suggestion will be studied by Fimmda and a representation will made to the central bank on behalf of the players.

Meantime, in order to reduce the depreciation losses booked in the investment portfolio for the September quarter, banks have proposed a hike the proportion of government securities that are held in the category which is not exposed to market risk.

This means, the more gilts can be transferred from the active category meant for sale and trading to category where gilts are held till maturity.

This will make them immune to the market risk as the banks are not required to mark to market the gilts under the held to maturity category. Twenty-five per cent of the gilts portfolio belongs to this category.

Banks are supposed to set aside funds to provide for losses arising out of the investment portfolio while the profits are notional. Thus, if more amount of gilts are held till maturity, the depreciation loss could be curtailed.

Banking sources said this could be a temporary measure as the inflation rate will come down during the end of the year and the northward movement of the interest rates will be stalled.

Bankers also suggested that for the September quarter, they should be allowed to use the reserves maintained as investment fluctuation reserve (IFR) before arriving at the profit and loss figure.

This is because as per the current norms, the provisioning towards interest rate risk from the IFR could be done as an off-balance sheet measure.

However, bankers are of the view that the very purpose to avoid a loss will not be met if IFR is used as off balance-sheet provisioning.

Since the beginning of the current fiscal, the ten year bonds have gone up by 150 basis points and is currently hovering at 6.50 per cent.