With the Reserve Bank of India (RBI) maintaining a status quo on rates and saying that it will ensure the availability of funds to help finance borrowings by the government, during the monetary policy on Tuesday, bond markets bucked up and the rupee edged down.
The central bank left its short-term interest rates and the cash reserve ratio unchanged and stressed that it would focus on growth in a big way.
The 10-year benchmark yield eased to 6.89% at the close as against 6.95% on Monday. At the same time, the rupee ended at 48.21/22 against the dollar, recovering from an early low of 48.3050, 0.1% weaker than Monday’s close of 48.16/17.
?Liquidity is not an issue but the cost of liquidity is a concern as demand for funds from government and private borrowers will increase on move into busy season starting October 2009. This will result in call money rate moving away from reverse repo rate of 3.25% towards repo rate of 4.75%, thus causing an upward shift in the rate curve,? said J Moses Harding, head of global markets group with IndusInd Bank.
He added that RBI should ensure sustainability of call rate close to reverse repo rate through injection of liquidity into the system to maintain an over-hang mode, through cut in statutory reserves or lower the base rate through cut in policy rates.
During the first half of 2009-10, net market borrowing of the central government through dated securities will be Rs 2,65,911 crore, of which nearly 63% at Rs 1,67,911 crore has been completed by July 27, 2009 and an additional amount of Rs 28,000 crore has been raised through de-sequestering MSS balances, the RBI said in its policy on Tuesday.
The open market operations undertaken so far have been Rs 33,439 crore, accounting for about 42% of the notified amount of Rs 80,000 crore. There is, therefore, sufficient headroom available to the RBI to manage the balance borrowing smoothly, the RBI said.
Duvvuri Subbarao, governor of RBI said at the post-policy press conference that the central bank will be able to manage government borrowing even if it is increased.
Banks have deployed Rs 1,16,235 crore with the RBI through the reverse repo window on Tuesday.
Thus, the overnight call rate ended at 3.20/30%, unchanged from Monday’s close, indicating ample liquidity in the banking system.
Duvvuri Subbarao also noted that as liquidity remains ample, the competitive pressure on banks to reduce lending rates has increased. Consequently, the transmission of policy rate changes to bank lending rates has improved since the last annual policy statement in April 2009, he said.
?As the short-term deposits contracted earlier at high rates mature and get repriced, it opens up room for banks to further reduce their lending rates,? he added.
In order to ensure that the increased government market borrowing programme does not crowd out credit flow to the private sector, the projection of money supply (M3) growth for 2009-10 has been raised to 18% from 17% during the monetary policy. Consistent with this, aggregate deposits and adjusted non-food credit of commercial banks are projected to grow by 19% and 20% respectively.