RBI’s big Rs 36,000 crore push resulted in a bond rally. Here’s what the central bank is doing

Mumbai | Updated: October 2, 2018 8:17:27 AM

Bonds rallied on Monday after the Reserve Bank of India (RBI) on Monday promised to infuse liquidity to the tune of Rs 36,000 crore in October through open market operations (OMOs).

RBI’s big Rs 36,000 crore push resulted in a bond rally.

Utsav Saxena

Bonds rallied on Monday after the Reserve Bank of India (RBI) on Monday promised to infuse liquidity to the tune of Rs 36,000 crore in October through open market operations (OMOs). The yield on the benchmark fell to 7.99%, down four basis points over Friday’s close of 8.03%. The money markets have been thirsting for liquidity; the daily average deficit was a high Rs 1.3 lakh crore a week ago before it started moderating to Rs 83,100 crore. One big reason for the shortage of liquidity is that the foreign portfolio investors (FPI) have been pulling out money from the bond and equity markets – the withdrawals in 2018-19 so far are nudging $12 billion.

Since April, the central bank has infused close to Rs 50,000 crore via OMOs but with the busy season kicking in much more systemic liquidity is warranted. “Money market deficit will average Rs 50,000 crore in the December quarter even after Rs 90,000 crore of OMO and Rs 10,000 crore cut in the net borrowings by government in H2FY19,” Indranil Sengupta, economist, Bank of America, wrote.

Banking system liquidity in recent weeks has been pressured by the continued intervention in the forex market to stem the rupee depreciation, a mismatch in the assets and liabilities of NBFCs and the quarter-end demand by the corporates.
While the bond markets are assuaged somewhat by the government pruning its net borrowings for 2018-19 by Rs 10,000 crore and gross borrowings by Rs 20,000 crore, there are concerns about whether the government will be able to stick to its fiscal deficit targets when indirect tax collections, so far, have been somewhat lower than expectations.

Economic affairs secretary Subash Chandra Garg said on Friday that the smaller quantum of borrowings would be made up by cancelling buyback and higher collections from small savings. The government recently raised interest rates on a host of savings products. In the second half of 2018-19, the government will borrow a net Rs 2.47 lakh crore. While in earlier years, the borrowing has been completed by the first week of February, this time the borrowings will continue till March.

Also, concerns remain about relatively weak NBFCs being unable to rollover their commercial paper (CP). The fairly strong linkages between mutual funds and NBFCs – MFs have invested large sums in short-term NBFC paper — is another cause for worry. Jayesh Mehta, MD & country treasurer, Bank of America, observed that while the stronger NBFCs will now be in a position to mop up more money since lenders will be willing to bet only on them, the weaker NBFCs could find it harder to access liquidity.

Last Thursday, the central bank allowed banks to use a bigger share of their statutory liquidity reserves (SLR) in order to meet their liquidity coverage ratio (LCR) requirement. The banks can carve out up to 15% of holdings under the SLR to meet their LCR requirements as compared to the earlier norm of 11%-13%. As per current regulations, the banks need to maintain 19.5% SLR and 16% LCR. However, treasurers remain sceptical of the degree to which the RBI’s 2% SLR cut, to fund LCR will help provide liquidity. “Unless the RBI stands ready to OMO, banks will not find it easy to find a counter party to sell G-secs to, especially if mutual funds do not roll over NBFC paper as experts expect.”

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