Mumbai: The Reserve Bank of India (RBI) on Monday said it would allow some primary dealers (PDs), the underwriters of government bond auctions, to maintain a “held-to-maturity” (HTM) category that would help them avoid booking losses on their portfolios.
The move will be applicable to only six stand-alone PDs out of a total of 17 PDs. They will not have to value HTM bonds, which they will hold until the securities mature, at fluctuating market rates, effectively allowing them to avoid so-called mark-to-market losses.
Mark-to-market is an accounting practice of assigning a value to a position held in a financial instrument, based on current market price and not at the price at which it was bought.
The move, valid through March, is expected to bring some respite to these dealers who are forced to buy the government’s unsold bonds at auctions. They typically sell them in the market below the purchase price.
Government bond yields— which move in opposite direction to price—have been rising since February and PDs have been selling bonds at a loss in the secondary market. Unlike banks, PDs until now were not allowed to maintain an HTM category; instead, they had to keep their portfolio in the trading book. This exposed them to yield movements and mark-to-market losses.
“In view of the fact that interest rates are going up, RBI may have considered giving the PDs some respite,” said Pradeep Madhav, managing director of STCI Primary Dealer Ltd.
The move could help stabilize the yields in the bond market and reduce volatility to some extent, said G.A. Tadas, managing director of IDBI Gilts Ltd as the supply could be less in the secondary market. “The pressure on us will be lessened and to that extent there won’t be any panic selling as we can keep the security and watch for the movements in the market.”
With Rs2.02 trillion worth of bonds yet to be auctioned till March, and appetite for government securities waning, bond dealers don’t expect yields to come down before then, meaning PDs could still have to book losses.