To lend a hand to banks facing huge investment losses, the Reserve Bank of India today announced a set of measures, including purchase of long-term G-Secs worth Rs 8,000 crore on August 23.
It will also allowi banks to spread the capital required to be set aside towards erosion in the value of Government securities over the remaining period of the current financial year.
Attributing the losses in banks’ government securities (G-Secs) portfolio partly to ‘abnormal market conditions’, the RBI hinted that the losses may be largely recouped going forward. This is a signal to the market that the central bank will try and soften interest rates.
In a major relief, the RBI said banks can spread the capital required to be set aside towards erosion in the value of G-Secs held in two short-term investment buckets — available for sale and held for trading — equally over three quarters of the current financial year.
The RBI said banks can continue to park G-Secs aggregating 24.5 per cent of their deposits in the held-to-maturity (HTM) investment category. Securities parked in HTM do not require banks to set aside capital even if there is erosion in their value. Current regulations require banks to bring down the securities in the HTM category from 25 per cent to 23 per cent of their deposits in a phased manner. This requirement stood at 24.5 per cent of deposits as at June-end 2013.
Further, within the above HTM limit, banks have been allowed to transfer securities from the available for sale and held for trading investment categories.
Banks will be relieved that they have been given the option to transfer the securities at the valuation as on July 15, the day when the RBI announced liquidity tightening measures to prop up the rupee.
The central bank said the issuance of cash management bills will be calibrated/scaled down to keep the money market rate around 10.25 per cent until volatility in the rupee eases.
The G-Sec rallied on Tuesday, apparently on the back of RBI intervention. The benchmark 7.16 per cent G-Sec maturing in 2023 rose by about Rs 2, with the yields softening by about 33 basis points.
According to S. Srinivasaraghavan, Head of Treasury, Dhanlaxmi Bank, the RBI’s measures will boost the confidence in the bond market. G-Sec prices could rally by as much as Rs 2 on Wednesday.