Banks Stay Gilt Skewed Despite Yield Dip

Banks' preference for gilts over credit continued unabated notwithstanding falling yields at the Reserve Bank of India auction window.

Further, investment in government securities during the current fiscal is far more than deposits mobilised by banks.

Increase in aggregate deposits amounted to Rs 15,843 crore during the period April 1 to July 4. As against this, investment in gilts amounted to Rs 21,693 crore.

The one thing that is worrying money market experts is the northward shift of yields, which is bound to happen after the conclusion of the government's borrowing programme, leading inevitably to depreciation of securities.

Banks who have entered the gilts secondary market in an over-heated condition will be the worst affected, they said.

 

The Centre has mopped up a gross amount of Rs 20,686 crore up to July 11. However, with repayments amounting to Rs 1,784 crore, the net government borrowing amounts to Rs 187,902 crore.

As against this the net borrowing by the Centre during the previous fiscal (April 1 - July 12 1996) amounted to Rs 4,787 crore.

"This means the banks have taken huge positions in the gilts this year.

Their investment decision perhaps is guided by the consideration that gilts is a zero-risk investment.

The yields may come under upward pressure during the latter part of the year, when the Reserve Bank of India takes an aggressive open market operation stance to suck out liquidity to meet its M3 targets", a treasury head with a foreign bank said.

Meanwhile, the continuous fall of the non-food bank credit was finally arrested with a rise of Rs 1,821 crore for the fortnight ended July 4, 1997.

Non-food credit or commercial credit increased to Rs 2,68,562 crore on July 4 from Rs 2,66,551 crore on June 27.

The Reserve Bank's second cut in the bank rate on June 25 and a low interest rate impulse sent to the financial system through the open market operations perked up the declining non-food credit.

The Reserve Bank governor C Rangarajan has also indicated to a turn around in credit offtake during the current fiscal.

The previous year (till July 4), saw credit on a downslide of Rs 2,753 crore.

As against this the decline is Rs 2,242 crore between April 1 and July this year.

The rise in credit offtake can be traced to the increasing investments of banks in commercial papers, PSU bonds and shares and debentures of the private sector which increased by Rs 2,169 crore as against an increase of Rs 1,108 crore last year. That apart, foreign exchange assets increased by $43 million to $25.452 billion till July 11 from $25.409 billion effecting an increase in the forex reserves to $29.379 billion from $29.336 billion during the same period.