Indian private banks' bond buys hit near three-yr high in Dec

MUMBAI, Dec 26 (Reuters) - Indian private sector banks

are set to post their biggest monthly purchase of government

bonds in the secondary market in nearly three years in December,

largely due to a rise in deposit growth, bankers said on Monday. Private banks have bought bonds worth a net of 216.20

billion rupees ($2.61 billion) this month through Friday, the

most since March 2020, Clearing Corporation of India Ltd data

showed. Bankers said higher yields make for an attractive entry

point, while the pick-up in deposit growth has also been a key

reason for banks to invest more in government securities, a

trend they expect to continue this week and beyond. "The major reason why private banks have increased buying

bonds is because of the deposit growth that they have witnessed

recently," said Arun Bansal, executive director and head of

treasury at IDBI Bank. "Banks may also be looking to buy at high yields, with

expectations of (interest) rate cuts next year, and gain on the

holding period." India's benchmark 7.26% 2032 bond yield was trading at 7.33%

on Monday, up five basis points so far in December, but off the

low of 7.18% hit earlier in the month. Treasury officials said as banks' deposit growth increases,

so does the demand to meet statutory liquidity ratio (SLR)

requirements, which is another reason for the recent rise in

bond purchases. SLR is the minimum percentage of deposits that commercial

banks are required to invest in liquid assets, such as

government bonds and state debt. The ratio is currently 18%. "As bank balance sheets expand, the need to hold something

more will keep banks on the investment book as well. It is not

going to decline," said Rajeev Mohan, president and head -

treasury and global markets at Kotak Mahindra Bank. Banks have been raising funds through bonds, certificates of

deposit and by raising fixed deposit rates over the past few

weeks. Bankers said while state-run banks have been holding excess

SLR, that was not the case with private banks. "When there is an increase in economic activity, the speed

of money going around increases and the need to maintain

frictional liquidity (short-term funds) at banks also

increases," Mohan said. "In this case, banks need to be more liquid ... Hence, I am

not expecting a dip in demand from banks."

($1 = 82.7800 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Swati Bhat and Savio

D'Souza)