In October 2023, banks have raised their investments in securities issued by the central and state governments by more than 19% year-on-year (YoY), as per the Reserve Bank of India (RBI) data.
As per experts, rising bond yields resulted in such investments appearing attractive to such investors. They were of the opinion that a higher statutory liquidity ratio (SLR) for banks, in line with a spike in deposits, has also increased from about 9% in October 2022 to 13% in October 2023, which also ensured this rise.
Investments by banks in state development loans (SDLs) and government securities (G-Secs) jumped to Rs 62.04 lakh crore on October 6, 2023, from Rs 52.45 lakh crore on October 7, 2022, as per the data.
Also, with the statutory liquidity ratio (SLR) holding at about 29% by banks and deposit growth remaining on an upward move, banks have been parking incremental money in G-Secs and SDL. At the same time, higher yields in G-Sec and SDL have made it quite lucrative.
Typically, the SLR is a reserve that banks are mandated to maintain by investing in approved securities as a percentage of net demand and time liability. Banks can invest in central government-dated securities, treasury bills (T-Bills), SDLs and other securities approved by the central bank.
Over a period, government bond yields have spiked after the RBI increased interest rates to control inflation. The central bank increased rates by 250 basis points (bps) since May 2022. As a result, the policy repo rate remains paused at 6.5% as of now.
As the yield on bonds experiences a high, prices dip in the secondary market, making investments in such securities attractive for banks, considering during a reversal of rates, they can benefit from capital appreciation, stated experts.
In October 2023, the yield on G-Secs jumped 10-15 bps after the RBI governor stated that the central bank may consider open market operation (OMO) sales to manage liquidity.
Generally, OMO relates to the central bank purchasing or selling G-Secs in the open market. Currently, the yield on the 10-year benchmark 7.18% 2033 bond is 7.3714%.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
