Banking stocks have soared up, as RBI decides to offer certain relaxation to banks
The hardening of long-term yields has resulted in banks incurring significant mark-to-market (MTM) losses in their investment portfolios. Since these MTM losses are partly resulting from abnormal market conditions and may largely be recouped going forward, the Reserve Bank of India (RBI) has decided to offer certain relaxation to Banks, though for a limited period.
Earlier banks were required to bring down their statutory liquidity ratio (SLR) securities in held to maturity (HTM) category from 25 per cent to 23 per cent in a phased manner over a specific period. The requirement stood at 24.5 per cent as at end June 2013. Statutory liquidity ratio refers to the amount that the commercial banks require to maintain in the form of gold or government approved securities with the RBI. It is determined as percentage of their total Demand and Time Liabilities. RBI has decided to relax Statutory Liquidity Ratio (SLR) requirement by allowing banks to retain SLR holdings in HTM category at 24.5 per cent. Since the holdings would be held to maturity, the relaxation norm would ensure that not market value but the book value of the bond would reflect in the bank accounts.
Further, banks have been allowed to transfer SLR securities to HTM category from available-for-sale (AFS) / held-for-trading (HFT) categories up to the limit of 24.5 per cent as a one-time measure. In addition, banks can spread over the net depreciation, if any, over the remaining period of the current financial year in equal installment on account of MTM valuation of securities held under AFS/HFT categories
These measures would bring down the MTM losses substantially. Banks would now be in a position to participate in the upcoming open market operations to be held on 23 August 2013.
Following the news, banking stocks rallied up on 21 August 2013. IndusInd Bank is leading the charts trading at 368 up by 8.9 per cent. Yes Bank is trading at 255.85, up by 5.4 per cent, HDFC Bank is trading at 600.55 up by 2.8 per cent, and Axis Bank has inclined to 999, up by 1.9 per cent.