The Reserve Bank of India (RBI) has issued draft guidelines for the Liquidity Coverage Ratio (LCR), proposing higher runoff factors for deposits (the denominator) and increased haircuts on Government Securities (G-Secs, the numerator). This change is expected to significantly reduce the LCR ratios of banks by 10% to 20%, with some banks potentially approaching the regulatory requirement threshold of 100%.
To address this, banks will likely need to increase their High-Quality Liquid Assets (HQLA), which mainly consist of Treasury bills (T-bills) and short-term G-Secs. Since adjusting the denominator is not a viable option, banks may resort to purchasing short-term G-Secs. Although these guidelines are set to take effect on April 1, 2025, banks are expected to start acquiring short-term G-Secs in advance to bolster their HQLA, thus driving up overall demand for G-Secs, especially at the short end. Preliminary estimates suggest this could result in an additional HQLA demand of Rs 5-6 lakh crore.
It is noteworthy that the recent Budget is already favorable for the short end. The Budget projects a net negative supply of T-bills amounting to Rs 50,000 crore, effectively reducing the supply in the short end. Additionally, the Government plans to draw down Rs 1.37 lakh crore from its cash balance, primarily due to fiscal savings achieved in FY24. This move will enhance banking liquidity and is expected to drive down short-end yields.
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