?? Indian Banks Adjust Strategies Amid Anticipated Liquidity Regulation Changes

Indian banks are intensifying their acquisition of INR-denominated corporate bonds in anticipation of a proposed tightening of liquidity regulations by the Reserve Bank of India (RBI). The RBI's draft guidelines advocate for an increase in the "run-off factor" for retail deposits associated with digital banking from 5% to 10%. This proposed adjustment would necessitate banks to augment their holdings of liquid assets under Basel III standards, potentially diminishing their liquidity coverage ratios (LCR).

In preparation for these regulatory changes, banks have markedly escalated their investments in premium corporate bonds, notably those issued by Hindustan Petroleum Corporation (HPCL) and JSW Steel. This strategic shift represents a significant departure from their historically lower engagement in such bond issuances.

Moreover, the draft guidelines also propose a discount on government securities, thereby amplifying demand for these assets. The reduction in government borrowing and the increased inclusion of government securities in global bond indices have exacerbated their scarcity, compelling banks to pivot towards corporate bonds to satisfy their liquidity requirements.

Nevertheless, there are concerns among some banks that these new regulations could impede loan growth and affect deposit mobilization, particularly given that a substantial proportion of retail deposits are already linked to online banking platforms.

#Financial Market