Drop in excess SLR holding a support for bonds?

A drop in banks' holding of mandated securities may support bonds, which have seen yields rise in spite of the hefty rate cut by the central bank.

Yields have gone up 20 basis points since the RBI's policy last week.

Supply concerns have again taken the centre stage. Barclays Capital, however, says some near-term relief may be likely.

Under banking laws, lenders have to keep a minimum of 24 percent of deposits as cash, gold or government bonds, called statutory liquidity ratio. This ensures a large captive demand for government paper.

Holding of excess SLR securities by banks fell to 4.73 percent as of April 6 from 6.12 percent on March 23, as per the RBI's weekly data released Friday.

Part of this can be accounted by the recent large deposit base growth, which rose by 1.9 trillion rupees in the two weeks to April 6.

Barclays Capital, in a note, said it expected the low excess SLR holding and redemptions in the first week of May to keep bonds supported over the next one week.

However, the seasonal rise in deposit growth may wane after the first week of May and the large supply may continue to weigh thereafter.

It expects the benchmark yield to trade in a 8.35 percent-8.70 percent range in the near term, moving towards the upper end after the first week of May. It was last trading at 8.57 percent.