The Reserve Bank of India is likely to ease the rules governing disclosure of transfer of bonds among various categories in the portfolios of banks. This could lead to a surge in the treasury income for banks. The central bank may say that banks need not disclose the transfer of state bonds from the held-to-maturity (HTM) category to the available-for-sale (AFS) segment, said a person with direct knowledge of the matter.
The RBI didn’t respond to an email seeking comment until publication of this report. Banks will also get to shift more of state loans which are in the HTM category to AFS — which means an increase in liquidity as these bonds carry higher coupon rates. This will also help state governments buy back bonds if they want to cut their borrowing costs in falling interest rate regimes. The matter was discussed in a meeting held between the RBI and state finance secretaries a week ago.
The RBI had proposed a rulebased approach in fixing new ways and means limits for state governments, replacing the previous expenditure-based system, ET reported on March 18. It was a proposal mooted during governor Shaktikanta Das’ meeting with the finance secretaries of 25 states and Puducherry. Issue of state bonds, known as state development loans (SDL) in market parlance, is expected to increase to Rs.4.3 lakh crore in FY20 from Rs.4 lakh crore in FY19, according a note by PhillipCapital India. Net-net, supply is higher in FY19-20.
Disclosure Norms
Total outstanding state bonds are more than Rs. 23 lakh crore. State bond yields are offering 75-85 basis points higher than the central government debt securities. “If banks are allowed to transfer state bonds from HTM to AFS without any disclosure, they should increase the stock of such bonds available for secondary market trading,” said a senior executive from a large bond house, who did not wish to be named. The differential between state and central government bonds should continue to compress until fiscal year end before it expands in the new financial year on higher supply, the person said.
This makes a 'buy' case for investors for now. The differential was as high as 110 basis points threefour weeks earlier, prompting investors to book mark-to-market profits with falling yields. Bond yields and prices move in opposite directions. State government bonds have of late assumed importance as such debt papers, which are now voluminous, can change market dynamics. “SDL crowds out corporate borrowings in the bond market by increasing costs,” BP Kanungo, deputy governor of the RBI, said in a note in September last year. A one-percentage point increase in the ratio of state debt issuance to GDP will result in an 11% decline in the volume (in rupees) of corporate bonds issued in FY16, he said.
The Economic Times, 22nd March 2019
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