Expectations that Reserve Bank of India (RBI) will announce the much-awaited move on higher held-to-maturity (HTM) limit for banks in the upcoming credit policy scheduled on October 27, the market participants are of the view that with the soaring bond yields there is no major advantage for banks and primary dealers to invest in the government securities as interest rates are set to rise.
The bankers and primary dealers would now be immune from providing depreciation on the securities and consequently their capital adequacy will be soaring up. Dealers say that with interest rates expected to rise in the near future, as inflation is expected to shoot up, banks may also opt for bonds with short-term duration.
?HTM limit maybe be hiked during the monetary policy. However, as of now, we are seeing that after every auction, bond prices are coming down with yields going up. So, right now, we are not seeing any real advantage to invest in bonds,? said a private bank dealer adding that banks have already touched the threshold of 27% to invest in securities.
There is a wide expectation in the market that the HTM limit for banks maybe increased by 150-200 basis points from the current 25% to 27%.
Currently, banks can invest bonds worth 25% of their deposits in an HTM account, where their value need not be mark to the market reflecting moves in bond yields.
“Basically, banks would benefit if the HTM is raised, as they donot have to report losses on bonds which have fallen sharply during 2009 as a result of the huge government borrowing programme,” explained KP Suresh Prabhu, chief bond trader at HDFC Bank. The 10-year bond yield has seen rising by 191 basis points so far in 2009.
The government has sold Rs 2.95 lakh crore worth bonds in April-September 2009 and plans to sell bonds worth Rs 1.23 lakh crore during the second half of 2009-10.
A public sector bank dealer noted that even with an interest rate hike of 50 bps, the bond yields go up substantially, thereby leading to huge losses for the banks, which then can be compensated to some extent if the HTM limit is hiked.
An analyst with a domestic brokerage noted that big banks will be able to save approximately Rs 450 crore if the depreciation on account of higher HTM is not provided.