Reserve Bank of India (RBI) governor Shaktikanta Das on Monday announced that the central bank will be conducting `1 lakh-crore of long-term repo operations in multiple tranches at the policy rate. This is in contrast to the much-awaited rate cut in line with the action taken by central banks around the world. So far, the central bank has already conducted `1 lakh crore of LTROs where it provided one-year and three-year tenor money to banks at the policy rate.
Although banks were expected to use the lower cost funds for further lending, the previous LTROs had helped bring down yields on short-tenor bonds by almost 60-70 basis points as lenders are believed to have deployed the funds in short-term securities to earn a profit on the spread.
The attractiveness of this spread trade reduced significantly in recent times even as short-term yields came down due to aggressive buying. Dealers had indicated that unless the central bank reduces the repo rate by 50 bps or elongates the tenor of the new LTRO, the market response may be lukewarm. The central bank notified on Monday that it will conduct Rs 25,000-crore worth of LTROs with a three-year tenor on March 18. “Based on further review of evolving liquidity conditions, additional tranches of the LTROs will be announced separately,” it said.
Vijay Sharma, senior executive vice-president at PNB Gilts, told FE that if the second set of LTROs comes with the same terms and conditions as last time, the response may not be as good as last time.
“If the policy rate continues to remain at 5.15% and the tenor remains the same as one-year and three-year, the LTROs will not elicit any reasonable response. Either the tenor of the LTROs has to be elongated to say 5 years or it has to be conducted after a repo rate cut of at least 50 basis points. Under current conditions, banks will only lend when there is credit demand. So, with no attractiveness on the yield curve side, there could be a lukewarm response if the LTRO tenor is not elongated or it is not preceded by a rate cut,” he said.
During Monday’s press meet, when the RBI governor was asked about any possible rate action, he said he is not ruling out anything. “I don’t rule out anything. I am not ruling out any possibility. I did say, yes, the MPC will take a decision but I don’t rule out anything. Depending on the evolving situation, we will decide on the timing of our action,” governor Das said.
Interestingly, the bond market rallied a bit on reports of a press conference by the central bank on Monday afternoon but the gains were pared when no rate action was announced during the conference. The benchmark yield fell to as low as 6.12% during the day before closing the session at 6.208%, down 11 basis points from the previous day.
Ananth Narayan, professor-finance at SPJIMR, believes that an off-cycle rate cut is still possible. “The unscheduled press conference raised hopes of immediate monetary rate action. At the conference though, while announcing increased FX swaps and LTRO, Governor Das indicated that he wants to time the use the rate cut ammunition judiciously, to maximise impact. We could still see an off-cycle rate cut of 50 bps before the April monetary policy,” Narayan said.
RBI, on Monday, also announced that it will further conduct $2 billion worth of 6-month US Dollar sell/buy swaps in continuation to the $2 billion of swaps it already did to provide liquidity to the forex market that was reeling under significant dollar-demand followed by persistent selling of equities and bonds by foreign portfolio investors (FPIs). The rupee closed 36 paise down at 74.27 to the dollar on Monday. The domestic currency has depreciated 3.9% this year, so far.