Colombo: India’s central bank is considering cutting the held-to-maturity (HTM) ratio for lenders starting April, while also looking into bond purchases via open market operations (OMOs) in the next two months to improve liquidity, a top official said on Saturday.
A cut in HTM—which is a type of debt that banks must hold till maturity—is aimed at spurring banks to lend more and boost a sluggish economy poised to grow at its slowest pace in a decade.
The limit is currently set at 25%, but traditionally has been aligned with the banks’ statutory liquidity ratio (SLR), or the mandated portion of deposits which banks must invest in government bonds and other approved securities, which is currently at 23%.
“Maybe we can do it in a phased manner, quarterly basis, half-yearly basis till the time it is phased out,” Reserve Bank of India (RBI) deputy governor H.R. Khan said on the sidelines of a conference in Colombo, regarding reducing the gap between SLR and HTM ratios.
“Implementation could be from early next year,” he added, referring to the fiscal that starts in April.
RBI uses several tools to manage the country’s persistent cash deficit, including requiring banks to hold onto different categories of debt via the HTM and SLR ratios or buying bonds from investors. The HTM can be reshuffled after obtaining the central bank’s permission.
RBI had said in October it was looking into a recommendation from a central bank panel to cut the HTM ceiling, bringing it in line with SLR.
Traders have said a reduction in HTM limit could hit bond prices, given debt supply would increase as banks would be allowed to sell some of their tied-up securities.
Concerns about India’s liquidity deficit have been exacerbated in recent days as the government has been cutting spending to meet its fiscal deficit target of 5.3% for the fiscal ending in March.
As a result, India’s bond yields rose to a near one-month high on Friday.
RBI on 29 January cut the cash reserve ratio (CRR), yet another liquidity tool through which it sets the amount of cash deposits that lenders must hold.
However, the action disappointed investors, who had hoped RBI would also inject liquidity via bond purchases conducted through OMOs, which would most directly benefit debt markets.
Khan said RBI could still resort to OMOs in February and March, the last two months of the current fiscal, and was watching government spending.
“As things pan out, we will see and if it is becoming a pattern, we will do OMOs in addition to CRR,” Khan said, referring to reduced government spending.
“There could be OMOs in the next two months,” he added. Reuters