Bonds sold off on Tuesday with the market disappointed that liquidity enhancing measures announced by the Reserve Bank of India (RBI) may not have an immediate impact. The yield on the ten-year benchmark fell in intra-day trades but rose to close at 7.46%, up four basis points from Monday’s close. The cash reserve Ratio (CRR) remains unchanged at 4%.
However, bankers were happy positive about the liquidity measures announced by the central bank. As Jayesh Mehta, managing director and country treasurer at Bank of America points out, the measures taken by the RBI on the liquidity front is better than a 50 basis points rate cut.
“The best part of the measures was the decision to keep the average liquidity deficit in the system in a near neutrality neutral mode. The RBI could do this in any way—either through OMO purchases or dollar purchases or any other method to infuse durable liquidity but the result would be increased cash with the banks which will help in boosting their balance sheet size,” Mehta added.
In order to remove the liquidity shortages in the system, the RBI on Tuesday said it would progressively lower the average ex ante liquidity deficit in the system to a position closer to neutrality.
The central bank has been keeping the liquidity shortfall equivalent to one percent of banks’ net demand and time liabilities (NDTL). A move towards a position closer to neutrality will lead to a release of about R90,000 crore into the system over a period of time.
“The period over which we move depends to some extent on market conditions, depends on the flows that come in. Remember net foreign assets is part of the liquidity move. So, we have to work it out. We have to see how this move takes place. An addition of one percent deficit to about neutral means an additional removal of deficit by about 80-90,000 crore,” Raghuram Rajan, governor, RBI, said.
However, the governor further said moving towards the position of neutrality could take close to a year or two.
* To smooth supply of durable liquidity over the year using asset purchases and sales
* To reduce minimum daily CRR maintenance from 95% of requirement to 90% from April 16
* To allow substitution of securities in market repo transactions to help create term money market