Informist, Wednesday, Apr 12, 2023

By Aaryan Khanna

MUMBAI – Public sector banks have been relentlessly selling gilts since the start of this month, trimming their holdings at a profit after prices rose over the past week.

In the first five trading sessions of the month, state-owned banks have net sold 214.15 bln rupees worth of gilts, according to data by Clearing Corp of India. They have been net sellers in all the five trading sessions, and top net sellers in four of those.

This follows a jump in the size of trading portfolios that banks have on hand. Once a year, commercial banks are allowed to shift their bonds designated as 'held-to-maturity' to their 'available-for-sale' books. This one-time adjustment happens in early April, and includes gilts and state government securities.

Bonds that are held to maturity are exempt from being marked to market prices, allowing banks to stash papers without fear of accounting for losses when yields are expected to rise. At the same time, bonds in the held-to-maturity category can't usually be sold when yields fall and prices start rising. Bond prices move inversely to yields.

Treasury desks often take advantage of this window to transfer stock that is profitable, or 'in-the-money', to the available-for-sale bucket, which is marked to market prices.

This has also increased the breadth in the secondary market. The share of the most-traded 7.26%, 2032 bond in the total market volume has gone down to 33.4% in the first five trading sessions of April from 35.2% in the last five sessions of March.

"There is the natural build-up of stock in the available-for-sale book after shifting," a treasury official at a state-owned bank said. "This paper is all in-the-money, and would have to be offloaded eventually; it is an annual ritual. It is just that the rate pause has allowed us to do it quite aggressively."

Last week, the central bank's Monetary Policy Committee surprised the market by maintaining status quo on the repo rate for the first since May. Most analysts and treasury heads had expected the committee to hike the repo rate by 25 basis points in the April policy.

As a result, the yield on the most traded 7.26%, 2032 bond fell as much as 17 bps to 7.15% this month, while that on the five-year benchmark 7.38%, 2027 bond dipped by 18 bps since March-end to briefly fall below the key 7% mark on Monday. Gilt yields have since recovered due to the persistent sales by state-owned banks.

"I would not like to call the sales drastic," a treasury head at another state-owned bank said. "It is just a matter of getting a good exit from some positions that all large banks would have got into in the last (financial) year."

While the shifting of bonds between accounting segments applies to all banks, public sector ones have been the biggest sellers as they have some of the largest gilt portfolios among domestic lenders. Moreover, they prefer to buy and sell in bulk near psychologically-crucial levels. Some banks have even shed the 7.26%, 2032 bond after buying a chunk of it when it yielded over 7.40% last year.

Most dealers expect the pause to extend to the next few meetings of the Monetary Policy Committee, with the next policy action seen to be a rate cut. Gilt yields are almost unilaterally expected to come down, particularly for bonds maturing in less than five years.

However, there is no consensus on whether this view will translate into further sales by state-owned banks. Some traders want to hold gilts for some more time until yields fall more significantly across the yield curve. Banks have a flexible limit of selling 5% of their held-to-maturity bonds through the year, which traders may tap into later if prices move up from current levels, dealers said.

Others are more concerned about showing a profitable Apr-Jun quarter and entering into fresh purchases when yields on bonds turn more attractive, as the market grapples with a record supply of gilts. The government has a gross borrowing target of 15.43 trln rupees for the current fiscal year.

"This portfolio churning is a natural part of the first quarter, people want to make space and show a profit in Apr-Jun," another treasury official from a state-owned bank said. "This will stop soon, and we are likely to be on the buying side again if yields remain here or go lower."  End

Edited by Avishek Dutta

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