MUMBAI: North Block's decision to categorize refinancing bonds as non-statutory will likely revive demand for sovereign debt on which yields had begun rising lately because of muted buying by state-run banks.
"Bond yields could dip a few basis points, as non-SLR status for recapitalization bonds is good news for the market that has been bleeding the past few weeks," said Ajay Manglunia, EVP at Edelweiss Finance.
Banks are mandated to invest a portion of deposits in government securities. It is now set at 19.5%. Most banks have held higher than this threshold in absence of any significant credit growth last calendar year. If banks were issued recap bonds, they would have stopped buying sovereign debt proportionately at the central bank's weekly sales.
A fall in demand sends yields higher, pointing in general to higher cost of funds in the economy.
Meanwhile, regulatory data published Wednesday showed that non-food credit growth at scheduled commercial banks rose 12% year-on-year. Outstanding non-food credit of scheduled commercial banks stood at Rs 81.48 lakh crore as on Jan. 5, compared with Rs 72.78 lakh crore a year ago.
"The non-SLR status was the key information for the bond market, and this will clear the air around recap bonds," said Naveen Singh, senior vice-president at ICICI Securities Primary Dealers. "The market was seeking clarity on this. This move should help retain investor demand for SLR in the weekly auctions in FY19."
Economic Affairs Secretary S C Garg said that these bonds would carry a maturity of 10-15 years. Bonds would be priced by factoring in the spread above the three-month average price of government securities.
The benchmark bond yield climbed two basis points to close at 7.28%. Refinancing bond details were announced toward the end of trading Wednesday.