Banks increase investments in SLR securities in December quarter. Here's why

Banks q3

Indian banks increased investments in Statutory Liquidity Ratio (SLR) securities in the third quarter of FY24 due to a rise in deposits and a stable yield in the government securities market, experts said.

Anticipation that yields would come down due to the inclusion of Indian bonds in the JPMorgan bond index also pushed banks to increase their SLR investments, they said.

SLR refers to the percentage of total deposits that commercial banks must invest in liquid assets such as central and state government securities and treasury bills.

Indian Bank, IDBI Bank, Union Bank of India, ICICI Bank, Canara Bank, Indian Overseas Bank, South Indian Bank, and Karur Vysya Bank increased their investments in SLR securities in the October-December quarter, according to data compiled by Moneycontrol.

The surge in investment remained up to 29 percent on a yearly basis in the reporting quarter, the analysis showed.

Banks SLR Investment in Oct-Dec quarter

“Bank investments in SLRs have gone up due to an increase in deposits and resultant NDTL (net demand and time liability), some built up due to a stable yield curve,” said Arun Bansal, executive director – head of treasury at IDBI Bank.

There were also expectations of yields coming down due to the inclusion of government bonds in the JPMorgan index starting in June and the absence of supply in March, as per the calendar of borrowings, Bansal added.

V Ramachandra Reddy, head of treasury at Karur Vysya Bank, said the Reserve Bank of India’s leeway to allow the held-to-maturity limit up to 23 percent till March 31 also impelled the growth of SLR. Softer interest rate expectations entice banks to front-load SLR requirements.

Most banks reported an increase in the range of 5-18 percent in their deposit base in the reporting quarter. Usually a higher deposit base warrants higher investment in SLR securities. When banks invest a portion of their deposits in government and state government securities, it ensures the solvency of the banks.

Also read: Top banks provide for AIF investments post RBI diktat

Stable yield

The yield on government securities in the October-December quarter fell 5-6 basis points after the JPMorgan announcement. The yield on the 10-year benchmark bond remained in the range of 7.17-7.24 percent during the quarter.

Experts said stability in the yield was despite higher inflation numbers. It encouraged banks to increase their investments in SLR securities. Also, the yield is expected to fall in the coming months once foreign inflows start after the inclusion of Indian bonds in the global bond index.

Whenever the yield on bonds falls, the price rises as it is inversely proportional in nature.

Indian government bonds will be added to the JPMorgan Government Bond Index-Emerging Markets starting June 28, 2024.

Also read: RBI norms on consumer credit: Banks see some impact but remain bullish

Outlook

Reddy said going by interest rate expectations in 2024, one can assume that the risk-reward is in favour of buying bonds at current levels.

Yields on government securities are likely to see a downward movement in 2024, also due to the expectation of rate cuts by the US Federal Reserve, experts said. The expected range for the 10-year benchmark government bond is 6.70-7.30 percent in 2024, Moneycontrol reported on December 28.

Bansal from IDBI Bank said ⁠future investment trends will be mostly driven by new guidelines effective from April 1, as banks have to realign the portfolio and re-strategise the trading book