'Cut in SLR under held-to-maturity bucket is a positive'

The Street feels the Reserve Bank of India (RBI)’s decision to reduce the ceiling on statutory liquidity ratio (SLR) holdings under the held-to-maturity (HTM) category by 200 basis points is positive.

In the annual monetary policy for 2013-14 announced today, RBI cut the ceiling on total SLR securities held under the HTM category from 25 per cent of demand and time liabilities to 23 per cent. Dealers and treasury executives said due to the reduction, securities beyond the ceiling would be brought to the market and more securities with different maturities would be traded. As a result, there would be more price points in trading, helping build a good yield curve.

RBI said banks might exceed the current limit of 25 per cent of total investments under the HTM category, provided the excess comprised only SLR securities.

“Now, the release of two per cent of net demand and time liabilities would add to supplies and put pressure on bond yields. But given the expectations of another round of a 25-basis-point cut in July and a positive carry of 50-75 basis points from the liquidity adjustment facility/collateralised borrowing and lending obligation counter, it may not lead to run-away weakness, despite demand-supply concerns,” said J Moses Harding, head (asset liability committee and economic and market research), IndusInd Bank.

RBI said to avoid any disruption in the market, the realignment would be implemented in a phased manner. A reduction of at least 50 basis points would be carried out every quarter, beginning with the quarter ending June.

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

But provisioning for banks will not go up due to this move. “If you have a mandatory SLR requirement, this is for funding the deficit. The impact is not neutral, but the restructuring impact, we had already factored in,” said State Bank of India Chairman Pratip Chaudhuri.