Bank investments in G-Sec, state loans rise 15.2% on-year on June 16

Banks

Investments by banks in central and state government securities rose 15.2 percent on-year to Rs 57.83 lakh crore on June 16, according to Reserve Bank of India data.

Dealers said rising interest rates pushed yields on these instruments higher, making them attractive for banks and other entities. When the interest rate goes up, the yield on these instruments rises and the price falls. Bond yields and prices move in opposite directions.

According to the data, the investments increased 15.2 percent on-year on June 16 compared with 6.6 percent growth on-year as on June 17, 2022.

In absolute terms, the investments by banks stood at Rs 57.83 lakh crore on June 16 compared with Rs 50.21 lakh crore on June 17, 2022, and Rs 47.11 lakh crore on June 18, 2021.

According to Ajay Manglunia, managing director of JM Financial, bank credit growth remains high at about 15 percent, although it has moderated from 17 percent in December 2022. Deposit growth also increased to 12 percent in June 2023 from 9 percent earlier.

“With the SLR (statutory liquidity ratio) holding remaining at around 29 percent by the banks and deposit growth remaining robust, we can see that banks have parked their incremental money in G-Sec and state development loans (SDL),” he said.

Vivek Iyer, a partner at Grant Thornton Bharat, said many companies are prioritising their initiatives and deferring investments, keeping global macroeconomic factors in mind. This pushed up the liquidity available within the banking system, which seems to have driven investments in G-Sec and SDL.

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Has this helped banks?

The recent fall in the yield on government securities helped banks to gain on their investments because of mark-to-market (MTM) gains.

“Any downward yield movement generally helps drive MTM gains on the fixed income investment portfolio. However, MTM gains were not the key driver for the deployment of surplus funds, while making positive MTM gains is always welcome,” Iyer added.

MTM is an accounting tool used to value assets based on current market prices.

Whenever the yield on securities rises, investors face MTM losses and when the yield falls, they benefit. The yield on these securities started falling after the central bank paused its interest rate increases due to better economic data.

During the rate hike cycle, the yield on government securities, especially the 10-year benchmark bond, touched 7.60 percent, but after the rate hike pause, it fell by 20-25 basis points (bps).

One basis point is one-hundredth of a percentage point.

According to the data, before the start of the rate hike cycle last year, the benchmark bond yield was 7.12 percent. It then peaked at 7.60 percent in June last year before starting to ease in September. Prior to the rate hike pause in April, the benchmark bond was 7.27 percent and fell to 7.20 percent on April 6.

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Will banks continue investing?

Dealers are of the view that investment by banks in these securities will depend on credit and deposit growth. Lower credit growth and higher deposits will encourage banks to invest more in these securities.

“Rate cut expectations are prevailing in the market but investments in G-Sec/SDL would depend on credit and deposit growth. If deposit growth remains robust, we can see banks further putting money into it,” Manglunia added.

However, some dealers said banks may continue their investments as a rate cut may not be on the table for at least two more quarters.

Iyer said given that global geopolitical uncertainty continues, interest rates won’t go down for at least the next two quarters. Only once inflation cools on account of reduction in aggregate demand in the economy will interest rates see a downward trajectory, which is expected by December 2023.