The Hindu Business Line : Banks begin to rejig investment portfolios

Bangalore, June 11 Anticipating a hardening of yields, public and private sector banks have begun juggling their investment portfolios in a bid to cut depreciation losses.

Bankers said that most of them were taking advantage of the Reserve Bank of India’s (RBI) guidelines of 2004 permitting them to hold government securities up to 25 per cent of their demand and time liabilities in the Held-to-Maturity (HTM) category from their marked-to-market holdings.

The shift, bankers said, largely in view of the anticipated firming of ten year yields from the current levels.

Bankers said that the shift would allow them to restrict their depreciation losses in their Available for Sale (AFS) and Held for Trading (HFT) categories of securities. Both AFS and HFT holdings are marked to market.

Currently, the ten year yield to maturity (YTM) is already up to 8.28 per cent or up 30 basis points from 7.97 per cent of March 28.

T-bill auctions

Bankers said that the hardening trend was also evident at the Treasury bill auctions. The cut-off yields on the 91-day bills were 7.68 per cent on Wednesday, up from the previous week’s 7.56 per cent. The firm trend, bankers said, was largely on account of refinery-driven liquidity demand, FII-led outflows and advance tax payments. Besides, bankers said credit was beginning to pick up.

As a result, bankers said that yields could test the 8.4-8.5 levels during the month. The possibility of these levels also stemmed from fears of an RBI intervention to break the inflation momentum.

Inflation has stubbornly remained above 8 per cent level with an upward bias after the petroleum price increases. Bankers therefore believe that a hike in repurchase rates, currently at 7.75 per cent or a further tweak in the Cash Reserve Ratios of 8.25 per cent is becoming inevitable.

Consequently, bankers said that they decided to effect the transfer to HTM at the earliest. The transfer would allow the banks to book some gains. Currently, high yields implied that the bonds at market prices were at a discount to face value. However, any redemption of the securities would be done at face value.

Under current guidelines, banks are allowed such shifts once, at the beginning of each financial year.

The valuation in the HTM category would have to be done at the cost of acquisition, instead of the redemption value.

Consequently bankers said, delays in the transfer could result in lower valuation of the investment portfolios given the northward trajectory of yields.

Bankers said that the flexibility to transfer more securities this year to the HTM category was in view of the big increase in deposits. Outstanding deposits were Rs 32.35 lakh crore or 8.5 per cent, more than that in the corresponding period of last year.

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