Banks have reduced their government securities (G-Secs) holdings in view of tight liquidity conditions and fluid geopolitical situation, according to market participants. Banks sold around Rs 1 lakh crore worth of government bonds in recent open market operations (OMO) conducted by the Reserve Bank of India (RBI), but bought treasury bills worth Rs 10,000 crore from the secondary market, thereby reducing net G-Sec holdings by Rs 90,000 crore, traders said.
G-Secs are a form of deposit that banks hold to maintain their statutory liquidity ratio (SLR), or minimum reserve requirement.
According to the market participants, government securities have become less lucrative for banks “as there are expectations that the RBI may not go for more than one more rate cut, making it difficult for the markets to rally.” “Plus, they are borrowing money at 8% via certificates of deposit, hence it does not make sense in deploying money in G-Secs,” a trader with a private bank said.
Further, with the guidelines on the liquidity coverage ratio (LCR) being postponed till at least March 31, 2026, banks need not require to invest in high-quality liquid assets, rendering government bonds a less-lucrative option to invest in. The guidelines were scheduled to be rolled out on April 1.
Banks are already maintaining 125-130% of the LCR requirement, “so, even if we do not buy (G-Secs), there is no problem at least for one more year,” said the head of treasury at a state-owned bank.
According to the latest RBI data, the banking system liquidity deficit stood at Rs 1.6 lakh crore. Market participants attribute this to increased RBI intervention in the currency market. A slowdown in government spending has further strained liquidity. Since December, the deficit has consistently remained above Rs 1 lakh crore.
The RBI has taken several measures such as OMOs and daily variable rate repo auctions to infuse liquidity. The RBI on January 31, February 13 and February 20 conducted OMO purchases worth Rs 1 lakh crore in three tranches – two of Rs 40,000 crore and one of Rs 20,000 crore.