Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now


You can switch off notifications anytime using browser settings.
11,999.1059.0
Stock Analysis, IPO, Mutual Funds, Bonds & More

Investmnent in government bonds not attractive

Funds are available at 6.5% from the central bank under its liquidity adjustment facility (LAF) while rates in the call money market, where banks borrow from each other, are at 6.75-6.85%.

, ET Bureau|
Feb 23, 2011, 03.20 AM IST
0Comments
MUMBAI: Banks are borrowing from the Reserve Bank of India (RBI) to lend in the money market, taking advantage of a rate arbitrage opportunity. Funds are available at 6.5% from the central bank under its liquidity adjustment facility (LAF) while rates in the call money market, where banks borrow from each other, are at 6.75-6.85%.

"Banks with excess government bonds are resorting to arbitrage deals," said a treasury official of the state-owned Corporation bank. Banks pledge government securities with RBI to raise short-term money, and are required to hold gilts as part of their statutory liquidity ratio (SLR). The banking system has 4% excess SLR holding.

However, banks are not buying securities to take advantage of the arbitrage. "Investment in government bonds does not look attractive, but short-term rates are," said a trader.

Banks will fatten their balance sheets to meet their targets by end March and this is pushing up short-term rates. While certificate of deposits of six months have touched 10%, inching closer to 12-month CD yields at 10.10%. The three-month commercial paper is in double digits at 10.38% while 6-month CPs are being issued to banks at 10.58%, the highest since June 2009. But these rates are lower than levels touched in the second half of 2008.

Bankers said there was little buying interest among banks at such rates. "Term deposit rates and CD rates are above 10%. At current rates, I don't know how many investors are willing to pick up commercial papers, even the ones with good credit rating. So volumes remain low," said Manish Saraf, treasury head of Dhanlaxmi Bank.

A slow growth in bank deposits has also tightened liquidity. According to the weekly statistical report published by RBI, bank deposits grew at 10.9% in 2010-11 against 12.1% in the previous financial year. According to Mr Saraf, "The slowdown in deposit growth rate could be due to two reasons. Depositors are holding out in the hope that rates will rise further. Banks are not yet going all out in raising high cost deposits."

Bankers say, the tightness in liquidity has worked well in the favour of RBI in monetary policy transmission. "It is a matter of higher demand and less supply, which has led to proper transmission of rates. So it is not the change in interest rates that has affected the transmission of the policy, but sucking out the liquidity in the system which has led to real transmission of rates," said, Moses Harding, global markets head of IndusInd bank.

RBI has mentioned in its monetary policy report that liquidity is likely to ease by April first week.

Close to Rs 17,000-crore government bonds will be redeemed next week but liquidity will be under pressure mid-March when banks face an outflow on account of advance tax.

Also Read

Investors flocking to tax-free, government bonds

How government bonds work

Amid NBFC crisis, lenders trust safety of government bonds

Where should I invest my proceeds from government bonds?

Where should I invest my proceeds from government bonds?

Comments
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links


Follow us on


Download et app


Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service