Bonds slide as RBI says banks must manage own interest rate risk
Indian sovereign bonds and rupee tumbled after Viral Acharya warned banks they can’t keep relying on RBI to manage their interest rate risks
Mumbai: Indian sovereign bonds and the rupee tumbled after RBI deputy governor Viral Acharya warned banks they can’t keep relying on the Reserve Bank of India (RBI) to manage their interest rate risks, as the rout in the debt market extended into its sixth month.
Repeated use of regulatory help “isn’t desirable from the point of view of efficient price discovery” in the bond market and effective market discipline, Acharya said late on Monday at a meeting of traders. “Interest rate risk of banks cannot be managed over and over again by their regulator.”
Acharya’s comments “added to the nervousness of an already jittery market,” said Vivek Rajpal, a rates strategist in Singapore at Nomura Holdings Inc. “Sentiment is already weak due to additional borrowings, uncertainty around the budget and higher oil prices,” he said.
Ten-year sovereign yields are set to advance for a sixth month in January, the longest run since 2000. The yield on the new benchmark due January 2028 jumped 11 basis points Tuesday to 7.38% and is up 27 basis points since it began trading on 5 January.
One basis point is one-hundredth of a percentage point.
“With relatively high duration and concentration of government securities in investment portfolio, bank earnings and capital remain exposed to adverse yield moves,” Acharya said. Government securities made up about 82% of commercial banks’ total investments in the year ended March 2017, and about 84% for state-run banks, he said. The exposure “has noticeably increased since 2014,” he said.
Lenders including State Bank of India (SBI) and Central Bank of India have asked RBI to let them spread the losses incurred on the sovereign debt in the three months ended December over two quarters, the Economic Times reported on 4 January.
The surge in yields may result in Rs15,500 crore ($2.4 billion) of mark-to-market losses on the available-for-sale portion of the banks’ investment portfolios in the December quarter, according to ICRA Ltd, a local unit of Moody’s Investors Service.
The Nifty PSE Index of 20 government-run lenders’ shares slid 2.1% on Tuesday, the most in five months. The rupee suffered its biggest loss in nearly a month, falling as much as 1%. The currency slid 0.9% to close at 64.0425 per dollar.
“The market is taking it as the RBI may not be willing to go out of the way to help manage the losses,” said Vijay Sharma, executive vice president for fixed income at PNB Gilts Ltd in New Delhi. “Hence, it’s expected that demand for government securities may take a further beating.” Bloomberg