Street turns positive on PSBs; RBI's OMO helps Nifty PSU Bank index gain

Amid multiple headwinds for the debt market, steps taken by the government and Reserve Bank of India (RBI) came as a respite for public sector banks (PSBs). While the government announced lower-than-expected borrowings for the October-March period after market hours on Friday, the central bank decided to purchase government bonds through open market operation (OMO) to the tune of Rs 360 billion in October, in three tranches. This is in addition to the Rs 500-billion OMO announced earlier in FY19.

Consequently, expectations of lower mark-to-market (MTM) losses — with a 12 basis point fall in government securities (G-Sec) yields in Monday's session — turned investor sentiment positive. After falling by 18.6 per cent in September, the Nifty PSU Bank index was up 4.1 per cent on Monday, against a 0.7 per cent rise in the Nifty.

PSBs are major investors in G-Secs. According to RBI guidelines, PSBs should keep aside a portion of their operating profits towards depreciation in market value of G-Secs (MTM losses) under the available-for-sale category, on a quarterly basis.  For the September quarter too, PSBs have to provide for MTM losses as G-Sec yields were up 12 basis points to 8.02 per cent from June.

But the banks will benefit in terms of MTM losses only if the positive impact on the G-Sec market persists for the ongoing quarter at least. There is a likelihood of rate hikes by the RBI in the monetary policy scheduled this week, amid elevated crude oil prices and a weak rupee. However, some remain skeptical of this. “When the government intends to soften the bond market pressure, I don’t think the RBI will spoil it by taking a rate hike, at least this time,” says G Chokkalingam, founder and managing director of Equinomics Research.

However, when the market stabilises, the RBI could take rate hikes given the macro-level hiccups such as high crude oil prices, irregular rainfall (monsoon) that could impact the kharif crop output, and the reluctance of FIIs to invest in G-Secs, Chokkalingam added. Arjun Nagarajan of SBICAP Securities says the RBI’s FY19 GDP forecast (7.4 per cent) seems more optimistic than what indicators suggest. Hence, a pause on rate hike appears more appropriate.