The Reserve Bank’s decision to reduce the held-to-maturity (HTM) category in the statutory liquidity ratio (SLR) to 23 per cent is likely to increase liquidity in the bond market.

According to experts, public sector banks might be the largest beneficiary of the reduction as they have excess HTM in their portfolio, which would be available for sale from period ending June quarter in tranches.

“The decision to reduce the proportion of the HTM segment within the SLR holdings to 23 per cent from 25 will help in improving the liquidity in the bond market,” IDBI Bank Treasury Head N.S. Venkatesh told PTI.

In the annual policy document, the RBI said that banks would be allowed to reduce the proportion of HTM in SLR holdings to 23 per cent from the present 25 per cent.

As per the central bank, the reduction will be effected by a quarterly reduction to the tune of at least 50 basis points beginning with the quarter ending June.

RBI’s step is an effort to bring parity of HTM with SLR holdings, which has been reduced to 23 per cent earlier.

Referring to the timeline, he said this reduction would not disrupt the government borrowing programme.

“This is non-disruptive in nature. There will be no impact on government borrowing programme,” he said.

Venkatesh also added that as public sector banks were holding an average of 24 per cent of HTM in comparison to an average of 18 per cent held by private banks, they would be the largest beneficiary.

“Public sector banks will be the biggest beneficiary out of this step as more HTM category bonds will move to AFS (available for sale) category for them,” he said.

Another treasury official from a mid-size public sector bank said this step would also help in increasing trading volume in different tenor bonds.

“With this step, volume in different tenor G-Secs will be higher, giving larger indicators for price discovery,” the official said.

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