BANKS FAVOUR BONDS TO DRAIN LIQUIDITY

As the credit demand remains weak even as deposits are growing, measures to drain out the liquidity from the banking system by RBI are inevitable. However, Banks are preferring issue of short term bonds by RBI under the market stabilisation scheme (MSS) against increase in CRR to suck out the liquidity. Banks are also not averse to a hike in the SLR as this would justify a demand for an increase in the percentage of bonds they can classify as "held to maturity" (HTM).

This suggestion is likely to be made by Bank Chiefs in their meeting with Mr. Subir Gokarn on January 14, the meeting of which is a prelude to RBI's monetary policy review for the third quarter will take place towards the end of January 2010.

As per the data available, bank credit rose only 10% on YOY basis till November 2009 as against 26%in the corresponding period last year. In the same period, deposits rose 18.4% against 20% a year ago.

MSS bonds are interest bearing securities created for the sole purpose of impounding surplus cash lying with banks. Banks are happy investing in MSS bonds as they yield market related returns and investment in these bonds do not attract requirement.

Source: http://economictimes.indiatimes.com/news/economy/finance/Banks-favour-bonds-to-drain-liquidity/articleshow/5328753.cms