Need out of the box solution:
RBI finds it tough to manage sharp downturn in bond yields despite holding operating policy rate firm at 8.0%. The agenda is to administer overnight rate at 8.5-9.0%, but excess liquidity from continued $ purchases, reduced government appetite and poor credit demand have exerted strong downward pressure on overnight rate into 7.0-8.0%. Banks are also reluctant to shed excess SLR baggage when deployment opportunities are few! It does makes sense for Banks to stay invested when downside risk is not significant. What to do with the cash on sale of excess SLR? Banks have already started moving the deposit rates down to avoid adding more to excess SLR baggage. RBI needs to show the way for deployment of cash generated through unwind of excess SLR funds, which is not productive and RBI sees it as lazy-banking by financial intermediaries.
Is Bond-Debt swap/reinvestment an out of the box option?
RBI OMO bond sales (both in primary and secondary market) have not yielded desired results; 10Y bond yield already down from 8.40% to 7.95% despite RBI being in the offer. If Banks are given the option to park the cash at similar yield for 6-12 months, it would be win-win for both RBI and Banks. The agenda is to give reinvestment option for Banks to sell Gilts and invest the sale proceeds in 6-12 months tenor short term debt instrument with RBI, without dilution in credit risk profile. The benefit for Banks will be to realise profit through unwind of excess SLR (beyond the tolerance limit of 2% between SLR and HTM) with a temporary short term reinvestment option without compromise on the return on sources of funds, which could be deployed later in credit products when demand pick-up is sighted in FY16. The benefit for RBI is to get the desired objective without the need to conduct unsuccessful OMO operation.
Just thinking aloud!
Moses Harding
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