Banks cut down on short-term bonds

EYE LONGER DURATION ON RATE CUT HOPES

- ANUPREKSHA JAIN

AMID TIGHT LIQUIDITY conditions in the banking system, banks have cut down on their investments in short-term government bonds, according to dealers. At the same time, banks are shifting towards building up positions in the longer duration papers due to rising bets on the Reserve Bank of India (RBI) cutting rates in February.

Market participants expect rates of T-bills and short-term bonds to remain sticky unless liquidity conditions ease.

A large section of the market is anticipating a cut in the policy rate by the central bank in February. Generally, when the rate cut happens, long-term bonds tend to perform better than shorter duration papers because investors lock in a higher interest rate for a long period of time.