Informist, Wednesday, Dec 6, 2023
–Sources: Banks want FIMMDA to ask RBI to delay bks’ new invest norms
–CONTEXT: RBI new norms on banks’ investment come into effect Apr 1
–Sources: Banks want FIMMDA to ask RBI to defer OMO sales to Jan-Mar
–Sources: Banks tell FIMMDA they see liquidity in surplus in Jan-Mar
–Sources: Bks tell FIMMDA to ask for OMO sale auctions on FPI inflow
–CONTEXT: FPI inflow seen Jan-Mar before JP Morgan gilt listing Jun
–Sources: FIMMDA to ask RBI to encourage banks to use MSF window
By Aaryan Khanna
MUMBAI – The Fixed Income Money Market and Derivatives Association is likely to have asked the Reserve Bank of India to delay the implementation of banks’ new investment norms, push back potential open market sales of bonds through auctions from this month to the March quarter, and formally encourage banks to use the Marginal Standing Facility, three bank treasury officials aware of the development told Informist.
Banks want the implementation of their new investment norms to be delayed from the current date of Apr 1 to allow them to tweak their internal systems to manage the change, the officials said.
On the issue of delaying open market operation bond sales through auctions, bankers feel these are best done when liquidity is in surplus, which is expected when inflows from foreign investors rise in the run-up to the inclusion of Indian government bonds in the JP Morgan Emerging Markets Bond Index slated for June. Such a delay could help sync the bond sales to foreign investment inflows, averting a fall in bond prices and the consequent hit to banks’ investments.
FIMMDA is a voluntary market body for the bond, money and derivatives markets. Typically, after an internal meeting, top officials from the trade body convey the consensus view of member market participants to the RBI around two weeks ahead of Monetary Policy Committee meetings. The central bank’s three-day policy review started today.
According to the officials, it is unclear whether these recommendations had been passed to the RBI formally or informally. None of the recommendations had been placed at a broader meeting of self-regulatory organisations with the central bank in the run-up to the monetary policy, said a fourth treasury official, who was part of this pre-policy meeting with the RBI.
FIMMDA did not respond to an email seeking its comment on these issues, and if any recommendations had been passed on to the RBI.
Treasury officials present at the FIMMDA meeting last month had asked the industry body to petition the RBI to push back the new investment norms as banks, particularly state-owned, were facing operational hurdles in implementing the norms by the start of the new financial year.
“These concerns have mostly been floated by state-owned banks, who were facing issues,” an official at a private bank said. “By now, the FIMMDA executives would have conveyed to the RBI that this is what the market wants – but the final call is of course up to the regulator.”
In September, the RBI had revised the two-decade old regulatory guidelines for accounting of banks’ investments to bring them in line with global standards, while introducing a symmetric treatment of fair value gains and losses.
The new norms remove the 90-day ceiling on holding period under held-for-trading books and the statutory ceiling on held-to-maturity bonds, which currently is 23% of net demand and time liabilities and was scheduled to be lowered to 19.5% by Mar 31, 2025.
As per the revised norms, banks can classify their entire investment portfolio under any of the three categories–held-to-maturity, available-for-sale, and fair value through profit and loss. Under the new norms, the current sub-category of held-for-trading would be included in the last category.
“How can we implement and then adhere to the new rules when there is a lack of clarity from the RBI?” said an official at a state-owned bank. “There are questions like amortisation from the date of acquisition, how to account for it when there are multiple trades in a single bond on a daily basis… We just want more time to make sure everything is sorted out beforehand.”
Market participants also want the RBI to encourage banks to use the Marginal Standing Facility to borrow from the central bank. Several banks are averse to using the window as the RBI had earlier frowned upon banks borrowing through this facility.
In his statement after the October Monetary Policy Committee meeting, RBI Governor Shaktikanta Das had advised banks to lend more in the call money market, rather than maintain large surpluses and park these in the Standing Deposit Facility. If the use of the MSF is encouraged, banks may not hold as much excess cash or park it with the RBI, said the private bank official quoted above. Currently, banks hold on to their surpluses as they do not want to be seen taking recourse to the MSF.
The third recommendation from FIMMDA was that the RBI should conduct its open market sales of bonds in the secondary market as it deems fit, but hold off the OMO auctions as of now since liquidity was already tight and the overnight rates were high, according to the officials.
Liquidity could possibly improve in Jan-Mar, when foreign portfolio investment inflows come in ahead of Indian gilts’ inclusion in JP Morgan’s emerging market debt index in June. The RBI’s timing of the OMO auctions during the March quarter would thus be appropriate, they said.
After the October policy statement, Governor Das had said that the RBI was open to conducting sales of government bonds to drain liquidity through open market operation auctions. These comments had spooked the bond market immediately, with the 10-year gilt yield shooting up 13 basis points on Oct 6, the most since August 2022.
Banking system liquidity has largely been in deficit between mid-September and November-end. On Nov 22, liquidity was in a deficit of 1.77 trln rupees, the largest gap since at least 2013.
“The liquidity conditions don’t really call for an OMO auction, and even the market has priced out an OMO auction by December,” another official said. “Yes, we were broadly comfortable with what the RBI has been doing in the secondary market, that is its own prerogative and anonymous, so it is not disruptive to the market.”
The RBI sold gilts in the secondary market every week in September and October, and by the last sale so far in the week ended Nov 3, its sales net totalled 185.05 bln rupees. End
Edited by Ranjana Chauhan
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