Mumbai, Aug. 21: The Reserve Bank of India (RBI) today heaved a sigh of relief when its latest measure led to a rally in bond prices, bringing relief to banks that were staring at a huge depreciation of their bond portfolio.
The RBI on Tuesday evening announced a few steps to prevent the hardening of long-term yields and this included a Rs 8,000-crore liquidity infusion through bond purchases (called open market purchases).
Apart from an indication that it may come up with similar purchases should the need arise, it gave in to the requests by banks to shift their bond holdings in the available-for-sale (AFS) category to the held-to-maturity (HTM) category, which will help lenders avoid huge treasury losses.
Lenders need to make a provision for the depreciation of bonds in the AFS category. Bonds in the HTM category do not require such provisions.
The measure had a salutary effect on bond prices with the benchmark 10-year security posting its biggest gain in three years.
During trading today, the yield on security, which had only hit a five-year peak a couple of days ago, fell by more than 60 basis points to over 8.20 per cent in intra-day trades.
Bond yields are inversely related to their prices. At the end of the day, the yield on the security settled at 8.4091 per cent, a smart gain of 49 basis points over its last close.
The rally in bond prices brought cheer to equity investors as banking shares gained in intra-day trade.
Though the gain was wiped off later as the stock markets succumbed to a fall in the rupee’s value, stocks such as Yes Bank and IndusInd Bank, which have been at the receiving end recently, ended with gains of 5.27 per cent and 6.20 per cent, respectively.
Bond yields have been on the rise since the RBI announced liquidity tightening measures to protect the rupee’s value. Yields on the 10-year security had hardened from 7.45 per cent as on June 30 to around 9.2 per cent by August 19.
According to estimates by credit rating agency Icra, both private and public sector banks were staring at Rs 25,000-30,000 crore of provisioning losses on their fixed income investment portfolio in the second quarter of this fiscal because of the rise in yields. This would have led to several banks reporting losses in the second quarter of 2013-14, thereby worsening the prevailing negative sentiment.
“The measures released by the RBI are likely to provide banks with the much needed temporary accounting relief. If the RBI measures are successful in bringing long-term yields under control, the relief could be more enduring,” it said in a note today.
It forecast that as a consequence of the RBI measures, the losses will now get reduced to Rs 3,000-5,500 crore.
However, there are a few who are not yet convinced by the RBI move. In a report, HSBC said that though these steps might provide some temporary relief to bond markets, this might not be enough to discourage banks from paring bond holdings.
HSBC said in a note to its bond market clients to be beware of the I’s — India and Indonesia.
The foreign bank said that the Indian bond markets remained vulnerable to tight liquidity conditions that could impact bond values — an indication that they should stay away from this market.