Bond markets: Govt can’t borrow as PSBs walk out

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Published: February 6, 2018 6:49:53 AM

Apart from promising a higher MSP, the Budget also promised that the government will make good any shortfall in the market price over the MSP, and there are no estimates of what this can cost.

Large losses in their bond portfolios have resulted in public sector banks (PSBs) all but deserting the bond markets. (Reuters)

Large losses in their bond portfolios have resulted in public sector banks (PSBs) all but deserting the bond markets. As a result, the Reserve Bank of India (RBI) has been forced to call off four auctions in just over a month. While Icra had put out an estimate of a Rs 13,000-crore bond loss in October to December, the losses will keep rising with G-Sec yields constantly rising. Yields on the old benchmark closed at 7.78% on Monday after closing at 7.76 on Friday. With this, they have risen 49 basis points over the last month and 89 basis points over three months. With no clarity on the impact of Budget announcements such as those on the minimum support price (MSP), banks are wary of more losses. Apart from promising a higher MSP, the Budget also promised that the government will make good any shortfall in the market price over the MSP, and there are no estimates of what this can cost.

Data from Bloomberg show that, in January, PSBs sold over Rs 10,000 crore in G-Secs after buying over Rs 12,700 crore in December 2017 and Rs 19,600 crore the month before that (see graphic). More than this, PSBs are no longer doing as much of value-buying as in the past. On February 8, 2017, for instance, when the benchmark yield closed 31 basis points up, PSBs bought Rs 11,345 crore of central government securities on a net basis. Similarly, on September 21 last year, state-owned lenders bought over Rs 10,000 crore of central government securities on a net basis when the yield closed 10 basis points higher compared to the previous session. Even on December 28, 2017, PSBs had bought close to Rs 6,500 crore on a day the benchmark yield ended the session 18 basis points higher.

In contrast, on January 29 this year, when the benchmark yield closed 14 basis points higher, PSBs bought only Rs 2,230 crore of central government securities on a net basis. Further, on the day of the announcement of the Budget, when the benchmark yield closed 18 basis points higher, PSBs bought only Rs 1,279 crore on a net basis. Ananth Narayan, professor, finance, SPJIMR, argues that Indian banks may be reluctant to buy into bonds as much as they did the last year. “RBI’s admonishment to banks earlier this year to be accountable for their market risk outcomes, and not ask RBI for forbearance, also appears to have had an effect,” he said. RBI deputy governor Viral Acharya had said that the central bank couldn’t give PSU banks a special dispensation when they had sought more time to absorb the losses.

“Already, there has been a lot of buying (of bonds) which is lying on the PSU banks’ books. This is contributing to the MTM (mark-to-market) losses. The confidence of the entire dealing community is hurt. We are also witnessing an increased demand for working capital loans which provide better returns than G-Secs. Naturally, we would look at those avenues that help us book some profits rather than take MTM losses,” said a treasury executive with a state-owned bank who did not want to be named. Another PSU banker pointed out that there is also a lot of uncertainty on the inflation and any rise in the Consumer Price Index could push the yields higher.

“Normally, we buy at levels where we find value and believe might be the peak level for the yields. However, there is a considerable amount of volatility in the market. We are not clear on the inflation outlook as well. The December CPI was also at a high level,” said a treasury executive with a state-owned bank. Ajay Manglunia, executive vice-president at Edelweiss Securities, noted that PSU banks have lost their appetite for bonds and do not have the ability to take any more MTM losses at a time when their performance is being monitored. “At one point in time, the state-owned lenders were counter-cyclical players — they bought when the yields rose and sold when the yields fell regardless of the levels. Till late December, PSU banks were seen buying on dips but the yields kept rising making it difficult for them to foresee any chance of booking profits,” he said.

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