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Our Bureau

Mumbai, Aug. 29 The Reserve Bank of India said that the stipulated Statutory Liquidity Ratio prescription of 25 per cent of net domestic demand and time liabilities of banks hampers the genuine development government securities market.

In its Annual Report 2007-08, released today, the RBI said, “The dilemma arises as to whether it can be assumed that there is a genuine government securities market, and hence reinforce more marketisation by rapidly reducing SLR or ensure a viable market borrowing programme and reduce SLR in tandem.”

“In this context, there is a need to assess the sensitivity of the fisc to interest rate burden if SLR is reduced rapidly,” the RBI said.

The RBI’s dilemma is that a lower SLR will mean that banks need to keep lesser government papers in their Held-To-Maturity portfolio. Therefore, more papers will be available for trading and volumes in the G-Sec market. But if banks’ requirement of G-Secs comes down, it could lead to a reduction in demand for government papers, affecting thereby the government’s borrowing programme.

This was evident when the recently issued oil bonds turned out to be illiquid despite carrying a yield 25 basis points higher than that on the SLR-eligible bonds of similar maturity. “It needs to be recognised that issuance of special bonds increases the overall supply of Government bonds and thus leads to an upward pressure on yields,” the RBI said.

More Stories on : Govt Bonds | RBI & Other Central Banks

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