Banks may go for short-term G-Secs with CRR cut in Sept

Economic Times

13 hours ago

ET Intelligence Group: Short-term government securities (G-Secs) are likely to report an uptick in demand with banks expected to park a chunk of their excess funds in these papers soon after the cash reserve ratio (CRR) rate cut, which will be implemented from September, injecting additional liquidity into the system. Muted credit demand and volatile bond yields may prompt banks to favour safer, short-duration instruments such as treasury bills (with maturities of less than a year) and G-Secs in the one and three-year range.
ADVERTISEMENT "Banks are unlikely to channel the entire surplus liquidity arising from the CRR cut into the credit market immediately," said V Ramachandra Reddy, head of treasury at Karur Vysya Bank. "In the interim, to manage credit risk prudently, banks are expected to deploy a part of excess liquidity into government securities."
On June 6, the RBI announced to reduce the CRR by 100 bps, releasing nearly ₹2.5 lakh crore to banks in a phased manner. This move aims to accelerate the transmission of repo rate cuts, making loans more affordable and reviving sluggish credit demand. However, bankers note that credit demand typically responds with a lag, with the full impact of a policy rate cut taking anywhere from six months to a year to materialise.
Credit growth has slowed, falling to 11% in FY25 from 20% in FY24, according to the RBI data. The trend has continued this year, with credit growth dropping to 8.9% in May from 11.4% in January."To manage excess liquidity, banks may choose to park some funds in short-term papers until credit demand picks up," said the head of treasury at a private bank. "Once loan demand revives, these investments can be liquidated and redeployed into advances."The recent hardening of bond yields-following the RBI's shift in monetary policy stance from accommodative to neutral-has made the case stronger for short-duration securities. The yield on the 10-year benchmark government bond rose to 6.37% on June 12 from 6.25% on June 5. To mitigate potential price risk from rising yields, banks are expected to favour treasury bills and other short-term instruments.
ADVERTISEMENT If market believes bond yields have bottomed out, banks will remain cautious about duration risks and prefer low-duration instruments. "At this juncture, staying at the shorter end of the yield curve appears to be a more prudent strategy," said Reddy.
Alternatively, some funds may be parked in the RBI's standing deposit facility, which currently offers a risk-free return of 5.25%. According to experts, the release of liquidity is strategically timed with the festive season, a period marked by increased credit demand. "The funds will be released in phases starting from September. This is the time when credit demand increases due to festive demand," explained Madan Sabnavis, chief economist at Bank of Baroda.
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