The Hindu Business Line : Fall in bond prices feared

THE 50-basis-point hike in the cash reserve ratio (CRR) may not be good news to bankers who planned to shift statutory liquidity ratio (SLR) securities to the held to maturity (HTM) category by the end of this month.

While the Rs 8,000 crore outflow itself is not such a major cause for concern, as the market is liquid to the extent of Rs 40,000 crore — the fear is the impact on `sentiment,' which may lead to a substantial decline in bond prices on Monday, and to further hardening in yields.

While RBI's move is towards controlling inflationary pressures, the timing couldn't be worse for banks, as they have to shift their SLR securities to the HTM category at the market price, say analysts.

It would have been in the interest of bankers to keep bond prices ruling high and the yields soft for the rest of this month. They did their best to keep the market buoyed with artificial buying interest, so that they wouldn't have to take a very big hit when they shifted their securities to the HTM category, analysts said.

"We will have to see how the market reacts on Monday. Even if bankers can hold up prices up to a point as they have been doing over the past few days, there are other market participants, like traders etc, who may panic and start unwinding positions," said a debt market analyst. "If this happens, it is just a matter of time before the selling pressure escalates and bond yields harden."

The yield on the ten-year benchmark paper, the 7.37 per cent 2014, has been ruling below 6 per cent levels over the past few days. In early August, the yield on this paper skyrocketed to 6.48 per cent levels.

While banks were hoping to transfer the securities at a `book-value' without accounting for depreciation, the RBI made it clear, that the shifting of securities had to be done at the market price. "We don't understand why the RBI has taken action at such a time. It is understandable that they have to take measures to curb inflation, why should they do it now, when the exchange rate is also stable. Couldn't they have waited a couple of weeks more?" said a banker.

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