The Reserve Bank of India is examining the government securities portfolio of both primary dealers and banks, triggered by concern of overleveraging and stocking of huge portfolios.
The government securities market has been rallying in the past few days after the finance minister hinted at rate cut by banks and the RBI.
The volumes in the government securities market had reached a high of 18,000 crore (180 billion) on Thursday and the yield on the 10-year benchmark security reached a low of 7.56 per cent. Till a few days ago, the yield on the 10-year benchmark paper was ruling in a range of 7.87-90 per cent.
Bankers said the examination of the bank books by the central bank has been triggered by the concern that banks may be maintaining bonds of higher duration or maturity anticipating appreciation in the gilts portfolio once the RBI opts for rate cut in the forthcoming monetary policy review by the month-end.
If the rates are not cut, then banks would run into losses leading to a rush for borrowings in the money market to make provision for the market losses. Most of the banks are seen stocking up long-term of bonds of 30-year maturity and above since the extent of appreciation in the portfolio is always higher for longer maturity papers.
Primary dealers, on the other hand, are leveraging their capital base and maintaining huge positions in the government securities. These could also run in market losses if the interest rate position runs haywire.
The RBI also fears off-market deals in the government securities where the banks may have sold government securities to non-savvy investors such as pension funds, trusts who are aflush with funds, after the government paid the interest on the special deposit scheme maintained by such trusts and funds.
According to dealers, the banks have been bullish since there are no auctions slated to be held in the rest of the financial year. The government has already stretched itself by borrowing in excess in June 2007 for buying the shareholding of State Bank of India from RBI.
Therefore, the RBI may slash the quantum of the borrowing programme if not completely cancel it, which is scheduled to be held next month.
Secondly, the yields on US treasury bonds have been falling tracking the recessionary trends in the US economy.
The yield on 10-year US treasury bonds has fallen from 4.60-4.70 per cent to 3.81 per cent. The liquidity, which has been a concern, has improved markedly with the RBI intervening in the market to buy dollars and releasing rupees.
Since the RBI has cancelled market stabilisation scheme, there has not been a supply in comparison to the maturing T-bills.
