Cut in SLR under held-to-maturity bucket a positive move

Trading volumes in bonds to get boost

The Reserve Bank of India's (RBI) decision to bring down ceiling on total Statutory Liquidity Ratio (SLR) holdings under Held-To-Maturity (HTM) category by 200 basis points is seen as a positive move by the street.

In the annual monetary policy for 2013-14 RBI cut the ceiling on total SLR securities held under the HTM category to 23% of Demand and Time Liabilities (DTL) from 25% earlier.

Dealers and treasury executives said with new rule, the securities which are in excess of ceiling will be brought into market. More securities with different maturities will be traded. As a consequence there will be more price points in trading, helping to build fine yield curve.

RBI said that banks may exceed the present limit of 25% of total investments under the HTM category provided the excess comprises only of SLR securities.

“Now, the release of 2% of net DTL will add to supplies and will put pressure on the bond yields. But, given the expectation of next round of 25 basis points cut in July and positive carry of 50-75 basis points from Liquidity Adjustment Facility/Collateralized Borrowing and Lending Obligation counter, it may not be run-away weakness despite demand-supply concerns,” said J Moses Harding, head - ALCO and economic and market research, IndusInd Bank.

According to RBI this realignment from 25% to 23% will be effected in a phased manner to avoid any disruption in the market.

The reduction of at least 50 basis points would be done each quarter, beginning with the quarter ending June 2013.

The move is also expected to boost trading volumes in non-SLR instruments and develop the market.

“Now banks will invest more in non-SLR securities like corporate bonds, commercial papers and certificate of deposits and equities. So, it will help to boost trading volumes in these instruments. At the same time banks will be very careful with the credit rating of these instruments,” said V Vishwanathan, general manager (treasury) and chief financial officer at State Bank of Mysore.