Government bond yields are seen falling in the near term, due to the Reserve Bank of India's (RBI) steps to further develop the government securities (G-sec) market and enhance liquidity.
In Tuesday's bimonthly monetary policy review, RBI decided to bring down the ceiling on Statutory Liquidity Ratio (SLR) securities under the Held To Maturity (HTM) category. And, to liberalise guidelines on short sale in G-secs. SLR is the minimum bond holding requirement for banks as prescribed by RBI. The central bank plans to bring gradually down the ceiling on SLR securities under the HTM category from 24 per cent of net demand and time liabilities to 22 per cent.
“Though HTM is reduced, it just makes way for banks to utilise those securities for Liquidity Coverage Ratio (LCR),” said Badrish Kulhalli, head of fixed income at HDFC Life. LCR is the proportion of high quality liquid assets to the total net cash outflows through 30 calendar days. RBI has mandated banks to maintain a 60 per cent LCR from January 1, 2015.
Beside, RBI said the limit on short sale for liquid securities would be raised to 0.75 per cent of outstanding stock or Rs 600 crore, whichever was lower (from 0.5 per cent of outstanding stock). Also, that banks and primary dealers be permitted to take short positions in G-secs in the over-the-counter market, within the total short sale limit.
“This will help to increase liquidity into the system and develop the interest rate futures market,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.
On Tuesday, G-sec yields rose due to profit taking. “Today is the last day of the quarter. Traders sold bonds for profit. Next week, yields are seen falling,” added Venkatesh.
The yield on the 10-year bond ended at 8.51 per cent, compared with Monday's close of 8.49 per cent.