Introduces Measures To Soothe Hardening Yields
As expected, the Reserve Bank of India (RBI) announced measures to cool off money
market rates and permit the banks to spread their mark-to-market (MTM) losses on their
bonds portfolio. The measures were necessary to avoid higher spill-over to long-end
rates, which witnessed a sharp spike and posed a threat to credit flow towards
productive sectors. While the measures are dynamic in nature, we believe they would
be positive for the banks and markets, who were staring at huge treasury MTM losses in
2QFY14. Currently, we have not made any changes to our basic assumptions in respect
of the banks in our coverage universe and prefer to wait and watch as to how things
pan out in the near term.
RBI strategy
The recent RBI measures to harden short-term interest rates were effective and resulted in
addressing the volatility in the exchange rate. Going forward, with the onus on keeping money
market rates around the MSF (Marginal Standing Facility) rate of 10.25%, managing liquidity
for productive sectors and avoiding any abnormal hit on the banks’ bond portfolio, the RBI has
announced some more measures which are as follows:
To conduct open market operations (OMOs) of long-dated government securities worth
Rs80bn on 23 August, 2013 and thereafter, as warranted.
Banks are allowed to retain their SLR (Statutory Liquidity Ratio) holding in the HTM (Held
To Maturity) category at 24.5% of their NDTL (Net Demand And Time Liabilities) as against
the RBI’s earlier directive to bring down SLR investments in the HTM category gradually to
23.0%. Also, the banks would now be allowed to transfer SLR securities to the HTM
category from the AFS (Available For Sale)/HFT (Held For Trading) categories with a limit
of 24.5%, as a one-time measure, at lower of book value or market value. This is in addition
to the option of spreading the depreciation, arising out of MTM valuation of AFS/HFT
securities, over the remaining period of the current fiscal year in equal installments. As a
result of this, we expect the banks to transfer all their securities which had MTM losses to
the HTM category.
Ever since bond yields started hardening, bank stocks were adversely impacted following
the MTM losses on their treasury book. With the latest RBI measures, bank stocks could
partially recover their losses.
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As expected, the Reserve Bank of India (RBI) announced measures to cool off money
market rates and permit the banks to spread their mark-to-market (MTM) losses on their
bonds portfolio. The measures were necessary to avoid higher spill-over to long-end
rates, which witnessed a sharp spike and posed a threat to credit flow towards
productive sectors. While the measures are dynamic in nature, we believe they would
be positive for the banks and markets, who were staring at huge treasury MTM losses in
2QFY14. Currently, we have not made any changes to our basic assumptions in respect
of the banks in our coverage universe and prefer to wait and watch as to how things
pan out in the near term.
RBI strategy
The recent RBI measures to harden short-term interest rates were effective and resulted in
addressing the volatility in the exchange rate. Going forward, with the onus on keeping money
market rates around the MSF (Marginal Standing Facility) rate of 10.25%, managing liquidity
for productive sectors and avoiding any abnormal hit on the banks’ bond portfolio, the RBI has
announced some more measures which are as follows:
To conduct open market operations (OMOs) of long-dated government securities worth
Rs80bn on 23 August, 2013 and thereafter, as warranted.
Banks are allowed to retain their SLR (Statutory Liquidity Ratio) holding in the HTM (Held
To Maturity) category at 24.5% of their NDTL (Net Demand And Time Liabilities) as against
the RBI’s earlier directive to bring down SLR investments in the HTM category gradually to
23.0%. Also, the banks would now be allowed to transfer SLR securities to the HTM
category from the AFS (Available For Sale)/HFT (Held For Trading) categories with a limit
of 24.5%, as a one-time measure, at lower of book value or market value. This is in addition
to the option of spreading the depreciation, arising out of MTM valuation of AFS/HFT
securities, over the remaining period of the current fiscal year in equal installments. As a
result of this, we expect the banks to transfer all their securities which had MTM losses to
the HTM category.
Ever since bond yields started hardening, bank stocks were adversely impacted following
the MTM losses on their treasury book. With the latest RBI measures, bank stocks could
partially recover their losses.
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