The rating factors in PNB Gilts' strong parentage in the form of Punjab National Bank (PNB; rated [ICRA]AA- (Watch with positive implications)/[ICRA]A1+) and the continued managerial, operational and liquidity support that is extended to the primary dealer (PD). ICRA also takes comfort from the strong capitalisation profile, large net worth and superior liquidity profile given the inherent nature of the PD business. The liquidity is supported by a highly liquid portfolio of Government securities (G-Secs) and access to call money and repo borrowings, in addition to access to a standing liquidity facility (SLF) from the Reserve Bank of India (RBI) for participation in primary auctions. ICRA takes note of the curtailment of access to overnight repo borrowings1 from the RBI under the liquidity adjustment facility (LAF), therefore requiring better planning of the overnight liquidity/funding requirements. The non-SLR book also constitutes highly-rated and well-diversified corporate bonds. Further, the company has adequate internal prudential norms and risk management policies, which mitigate the market risks arising out of interest rate movements that are intrinsic to a PD's business and the credit risk in the non-SLR book. ICRA notes the less-diversified revenue stream of the company and high reliance on interest income and trading income. ICRA further notes the susceptibility of the company's overall profitability and capitalisation profile to interest rate movements. With a decline in bond yields in FY2020, PNB Gilts reported an improvement in trading profits. This, coupled with higher leverage (hence a higher investment portfolio) and a cut in the repo rate, boosted the overall net interest income (NII) in FY2020. During FY2020, the company has completely written off its exposure in some of stressed corporate bonds which impacted its bottom line. Nonetheless, the profitability improved with a return on net worth of 17.9% (annualised) in FY2020 (6.0% in FY2019). As per the recent policy, the board has approved a higher leverage limit of 20 times of the net owned funds (NOF; previously 13 times), which could add to the volatility of the profits. Thus, the company's ability to adhere to its risk management policies will remain critical to minimise the impact of the adverse interest rate movements. The benign inflation outlook and slow economic growth are likely to keep the interest rates at benign levels in FY2021 and will provide PNB Gilts with enough trading opportunities. Its ability to capture these opportunities will drive its overall profitability, even as limited diversification of its revenue stream will mean high dependence of overall profitability on NII and trading profits.