MUMBAI, July 15 (Reuters) - Indian banks are planning to slow purchases of government securities until the end of September, executives and analysts say, after a sharp rise in yields that will pressure bottom lines already weighed down by bad loans.
The retreat by buyers in the face of an increased supply of govermment bonds could raise the government's borrowing costs.
That would be a blow to a government that has to spend more to boost economic growth, as it would have hoped to benefit more from the central bank's interest rate cuts earlier this year.
The Indian government plans to borrow 6 trillion rupees ($94.5 billion) in the fiscal year through March 2016. So far, it has raised 2.1 trillion rupees.
"We will avoid adding big amounts to the trading portfolio," said state-run Union Bank of India (NSE: UNBK ) Chairman and Managing Director Arun Tiwari in Mumbai.
State-run lenders, which make up the bulk of India's banking sector, are the largest buyers of government bonds in the primary market, and profits from treasury holdings typically make up between 20 and 30 percent of their earnings.
But rising yields during the June quarter squeezed profits at a time when these banks are under pressure to improve profitability and margins.
"We are reducing duration on our trading books and will only buy to the extent of our requirement, not more than that," said a treasurer at another state-run bank, declining to be named as he was not authorised to speak to the media.
The central bank's surprise open market sale of government bonds this week added to pressure on yields. And traders expected more of these sales.
To meet India's statutory liquidity ratio (SLR), banks have to maintain at least 21.5 percent of their deposits in government securities, ensuring captive demand.
However, banks currently hold closer to 28 percent in government securities, seeking safe havens to counter loan growth hovering at the lowest levels since September 2014 and steady deposit growth.
But there was now an incentive to trim bold holdings.
Union Bank's Tiwari told Reuters that the cost of bringing in term deposits is higher than interest earned from buying a 10-year bond.
Though bond yields are up just 13 bps since the RBI began cutting interest rates in January, sharp swings in the second quarter, when the most traded 10-year bond yield IN084024G=CC rose 30 bps really ate into banks' earnings.
With worries that weak monsoon rains will push food prices high, concerns over inflation have dampened expectations for another rate cut in the near term, and dealers expect bond yields to rise another 15 basis points in this quarter.
If the RBI relaxes foreign investment limits in government securities it could bring some relief to the bond market, otherwise it is hard to see who would offset the reduced demand from domestic banks.
"There is no marginal buyer. Risk appetite has clearly shrunk," said a senior trader at a private bank.
"Unless foreign limits are relaxed or inflation falls below RBI's trajectory, the government will end up paying higher yields." ($1 = 63.5000 Indian rupees)
Add Chart to Comment
We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:
- Enrich the conversation
- Stay focused and on track. Only post material that’s relevant to the topic being discussed.
- Be respectful. Even negative opinions can be framed positively and diplomatically.
- Use standard writing style. Include punctuation and upper and lower cases.
- NOTE: Spam and/or promotional messages and links within a comment will be removed
- Avoid profanity, slander or personal attacks directed at an author or another user.
- Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
- Only English comments will be allowed.
Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.