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  1. RBI’s plan to infuse Rs 1 lakh crore in banks helps but bonds to remain under pressure

RBI’s plan to infuse Rs 1 lakh crore in banks helps but bonds to remain under pressure

The Reserve Bank of India on Monday announced to infuse Rs 1 lakh crore into the banking system via four Variable Rate Term Repo auctions in addition to regular auctions, which CARE ratings said, will help provide liquidity in short-term but long-term liquidity shortage will continue to put pressure on India's benchmark 10-year bonds.

By: | Published: March 8, 2018 7:52 PM
RBI, Axis Bank, Indian Overseas Bank , RBi slaps Axis bank, Know Your Customer norms, IRAC norms, news on axis bank, news on IOB bank RBI’s plan to infuse Rs 1 lakh crore in banks helps but bond yields to remain under pressure. (Image: PTI)

The Reserve Bank of India on Monday announced to infuse Rs 1 lakh crore into the banking system via four Variable Rate Term Repo auctions in addition to regular auctions, which CARE ratings said, will help provide liquidity in short-term but long-term liquidity shortage will continue to put pressure on India’s benchmark 10-year bonds.

With companies required to make advance tax payments by March 15, 2018, coupled with their other year-end payment obligations, the demand for funds would be high which in turn could strain banks liquidity.

The rating agency said that although the additional liquidity infusion by the RBI “would help alleviate the liquidity shortfalls in the immediate run, inflationary expectations and possible rate hikes by the RBI would tend to dominate market sentiments in the fiscal year 2018-19.

The RBI announced the special auction with an aim to address the additional demand for liquidity in the banking system and to provide flexibility on account of “increase in currency in circulation and advance tax payments by corporates”.

“With yields expected to remain at elevated levels for the remainder of the fiscal year, the interest rates are unlikely to see significant moderation. Shortfalls in system liquidity would further pressure interest rates,” CARE ratings said in a report.

According to government estimates, it can collect Rs 5.63 lakh crore in corporate tax for the FY19. Of this  69% has been collected as of January and the balance of Rs 1.74 lakh crore is expected to be collected by February and March.

The Rs 50,000 crore of additional auctions by the RBI before March 15 and rest later in the month would be primarily towards meeting the advance tax liability. CARE Ratings said, “The central government’s borrowing could also have a bearing on the liquidity situation.”

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