Indian banks speed up bond purchases as holdings near regulatory minimum threshold

State-owned banks bought $2.5 billion of bonds in February, the biggest monthly purchase since 2006, after selling heavily over the past year as the RBI injected liquidity.

State Bank of India (SBI) was issuing authority for electoral bonds | Representational image | ANI

New Delhi : Indian banks’ bond holdings have neared the regulatory minimum threshold, prompting some to speed up purchases, with the treasurer at the country’s second-largest state lender saying higher yields are boosting demand.

“Banks haven’t bought for the last nine months, so we’re seeing the interest come back now,” Sushanta Kumar Mohanty, chief general manager – treasury and global markets at Bank of Baroda, said in an interview in Mumbai.

Banks’ holdings of government bonds as a portion of deposits were at the lowest in seven years as of January-end, according to central bank data. That prompted state-owned lenders to buy a net 225.8 billion rupees ($2.5 billion) of bonds so far in February, the largest monthly purchase since Bloomberg began tracking the data in 2006. Over the past year, they were heavy sellers as the central bank stepped up debt purchases to inject liquidity into the banking system.

The revival in demand from local lenders — the biggest holders of bonds — offers relief for India’s debt market, which has been facing weak demand in recent months. Mohanty, who oversees about 3 trillion rupees in state and sovereign debt, expects bank buying to push down yields by at least 10-15 basis points.

India’s benchmark 10-year bond yield has already eased around 10 basis points from a one-year high of 6.78% hit earlier this month. At that time, the gap between the benchmark yields and the RBI’s policy rate climbed to the highest level in over three years.

“Banks sold their holdings when the yields were low — it didn’t make sense for them to replenish at the same time,” said Mohanty, a 30-year veteran at the bank. “These levels make sense for buying. The spread between the policy rate and bond yields is quite high.” He added that he prefers a low-to-medium duration strategy.

Banks’ debt holdings have fallen to 27% of deposits as of Jan. 31, down from 30% a year ago, RBI data show — moving closer to the regulatory minimum. Indian rules require banks to keep at least 18% of deposits in liquid assets such as government securities. In practice, they typically hold an extra 4%—6% in sovereign papers to meet Basel III liquidity requirements.

Mohanty said the pick-up in demand is also reflecting in the strong bidding seen at federal and state debt auctions over the last two weeks.

This report is auto-generated from Bloomberg news service. ThePrint holds no responsibility for its content.