India's 10-Year Bond Yield Lowest In Two Years On Draft RBI Liquidity Rules

The yield on India's benchmark bond and the five-year sovereign paper fell to a two-year low after the central bank proposed a draft circular for better liquidity management.

The yield on the 10-year bond fell to 6.94%, the lowest since April 2022. The five-year bond extended losses, dropping 5 basis points to 6.83% on Friday, the lowest since May 2022.

The framework suggests a new set of rules that will require banks to make special arrangements to avoid excessive run-off of retail deposits.

Retail banks and lenders with a greater share of retail deposits will see a greater impact, according to brokerages. Federal Bank Ltd., IDFC First Bank Ltd. and AU Small Finance Bank Ltd. will be highly impacted, according to Motilal Oswal Financial Services Ltd. Impact on banks' liquidity coverage ratio is broadly 7-13%, a July 25 note said.

The new norms will likely make the liquidity situation even tighter for the Indian banking system, potentially raising the demand for sovereign paper using the yields lower. The draft proposes to implement these norms from April 1, 2025.

The LCR at banks is at 130% as of March 2024, according to Anil Gupta, senior vice president and co-group head of financial sector ratings, ICRA Ltd.

Depending on the level of such customers, the reported LCR could decline by 10-15% to 120% or 115% respectively, he said. "A 10% decline in reported LCR may additionally pose a requirement of additional HQLAs of almost 4.0 lakh crore at system level."

Here is what brokerages have to say about the draft LCR framework.

• Stable deposit: Run-off factor has been increased to 10% from the existing 5%.

• Less stable deposit: Run-off factor has been increased to 15% from existing 10%.

• The run-off factor is unanticipated deposit withdrawal.

• Steps to strengthen liquidity framework of banks.

• Aim to enhance the overall liquidity resilience of banks, better prepared to manage risk.

• Impact on banks' LCR ratio is broadly 7-13%.

• Federal Bank, IDFC First Bank and AU Small Finance Bank have relatively lower LCRs versus other private banks.

• Increase in SLR demand and a reduction in loan-to-deposit ratio.

• Lower asset yield.

• Increase in retail deposit competition and deposit interest rates.

• Lower net interest margins.

• Lower G-Sec bond yields.

• The major change is the additional 5% run-off factor for retail deposits.

• The framework appears to have excessive measures.

• Assuming 80% retail deposits are enabled with internet banking, LCR to decline by 10-15% for large banks.

• The same level of LCR could impact the return of assets by 0.05%.

• Retail banks to have a larger impact.

• Higher runoff for retail deposits could reduce LCR by 10-15 pp for the large banks.

• Banks with a greater share of retail deposits will see a greater impact.