Switches from liquidity absorption to injection through OMOs; allows shifting of Gilts from AFS to HTM basket.
The Reserve Bank of India (RBI) has decided to save banks from getting hammered under its rupee-rescue measures – by switching from liquidity absorption to injection.
On Tuesday, which saw the rupee cross the 64 per dollar mark in intraday trade, the central bank said it would trim the issuance of cash management bills from `22,000 crore and inject liquidity of up to `8,000 crore by purchasing government bonds under open market operations (OMOs).
The local currency finally ended the day at a 63.23, 10 paise lower than Monday’s close and a new low. Traders said heavy intervention from the RBI helped the rupee recover from the day’s lows.
Incidentally, for the past month or so, the RBI has been using the very same channel (OMOs) to suck out excess liquidity – through sale of bonds – to save the rupee from depreciating further.
This has had an adverse impact on the bond markets.
The measures were meant to raise short-term rates and not harm long-term money, the central bank has stated now. “The hardening of long-term yields has resulted in banks incurring large mark-to-market (MTM) losses in their investment portfolio,” it said, attributing the losses partly to abnormal market conditions.
To minimise these losses, the RBI has allowed banks to shift government securities from ‘available for sale’ (AFS) to ‘held to maturity’ (HTM) – a category that prevents MTM losses on bond investments of banks.
Typically, banks are allowed to rejig portfolios only once every financial year, a facility the lenders have already availed this year.
Banks could keep statutory liquidity ratio (SLR) securities at only 23% of their net demand and time liabilities in the HTM category, according to regulatory norms.
The cap was earlier at 25%, which the RBI had asked banks to bring down in a calibrated manner. As of end-June, the requirement was at 24.5%.
On Tuesday, the RBI decided to relax this requirement by allowing banks to retain holdings in HTM category at 24.5% until further instructions.
The shift of portfolios from AFS to HTM would be allowed at the market rates as on July 15, the date the RBI had turned up the heat on short-term rates. Since then, bond yields had jumped about 80 basis points (bps).
The RBI said banks can spread the net depreciation on AFS securities over the rest of the financial year, saving them from a massive hit to their treasury incomes this quarter.
“These relaxations would bring down the treasury loss by at least 25% for our bank,” said a senior official of a large public sector bank. Lenders had asked for these relaxations from RBI provided rupee failed to stabilise after liquidity tightening measures.
Bond yields, which had shot up to five-year high levels of 9.23% on Monday, fell 33 bps to 8.9% on Tuesday as investors took advantage of rising yields to enter the bond market.
Going forward, bond yields are expected to ease further and stabilise around 8.5% levels riding on the RBI relaxations.
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