Centre not to hike banks' held-to-maturity ceiling

“There is no compulsion over the Reserve Bank of India right now to raise the HTM cap, and finance ministry is not pushing for it,” the finance ministry official, who did not wish to be named, told Reuters.

A hike in the HTM limit will enable banks to set aside more bonds in a separate account, free from mark-to-market requirements, reducing their risks and thus, stimulating demand for debt, traders said.

Raising cap on banks’ debt holdings will help aid the government’s borrowing programme but there was no need for it as the large surplus liquidity in the system and lack of private credit demand was ensuring enough funds to meet the government’s needs, the official said.

Flow of supplies

A continuous flow of supplies has pushed the 10-year bond yield up 220 basis points so far in 2009. The government plans to borrow a gross Rs 4.51 trillion ($96.4 billion) from the market in the 2009/10 fiscal year ending in March, and has sold bonds worth Rs 3.15 trillion so far since April.

Reserve Bank of India Deputy Governor K C Chakrabarty had said earlier in October they were considering such a hike in HTM, but no decision had been taken.
The RBI would consult accountants and look at global standards before deciding on whether to increase the HTM cap, Chakrabarty had said.

The expectation of an increase in the HTM limit helped bonds ease from 10-month highs last month and has kept them below that level since, despite worries of a possible tightening in policy settings.

The final decision in this regard however, would have to be taken by the central bank,
the finance ministry official said.

Bankers’ view

Incidentaly, ahead of its second monetary policy review that is on October 27, Reserve Bank Governor D Subbarao had recently held disscussions with bankers credit growth, interest rate hikes and inflation.

State Bank of India Chairman & Managing Director O P Bhatt, ICICI Bank Managing Director & Chief Executive Chanda Kochhar, Standard Chartered Plc Chief Neeraj Swaroop, IDBI Bank CMD Yogesh Agarwal and HDFC Bank chief Aditya Puri, were among those who attended the meeting.

The chiefs of various bank, at the meeting, expressed their views on credit growth and raising the limit of bonds under the HTM (held-to-maturity) category. Bankers generally opined that there was enough liquidity in the system and interest rates could possibly rise post-Diwali after surplus liquidity was mopped up.