 "Banks borrow record Rs 2.66-lakh cr from RBI")
The banking system always comes under severe liquidity shortage in the middle of March but even so, they borrowed on Wednesday an unprecedented Rs 2.66 lakh crore from the Reserve Bank of India (RBI), as money from the system flew to government coffers as part of advance tax outflow.
Even before the advance tax outflow started, the liquidity shortage was Rs 1.49-1.66 lakh crore. “This year, the tightness has been extraordinary,” said Saugata Bhattacharya, chief economist at Axis Bank.
China’s exchange rate adjustment in January meant investors from emerging markets liquidated their portfolio aggressively. India saw equity outflow of nearly $2.5 billion in about a fortnight in January, even as fresh debt flows didn’t come in as the (government-set) limits were mostly filled.
That created a lasting hole in liquidity, which got accentuated as the government refused to part with its cash balances kept with RBI. These were Rs 1.2 lakh crore in December after the advance tax outflow, which the government did not spend immediately. The surplus cash balance of the government meant for auction, estimated at 70-80 per cent of the total cash balance, was Rs 1.3 lakh crore.
However, RBI has said it is ready to pump the liquidity needed to keep call money rates anchored around the repo rate. The central bank has stepped up its bond buying programme from the secondary market and has so far done three bond purchases under its open market operations (OMOs). On Thursday, RBI purchased Rs 14,409 crore of bonds from the market.
RBI might have to do more OMOs to ease liquidity, said Soumyajit Niyogi, associate director at India Ratings. Also, the government might opt to redeem its bonds prematurely to ease the liquidity pressure, he said. However, once the government starts spending its cash balances, the system might become liquidity-surplus, Niyogi said.
Bond yields though, might not get impacted by much, as bond prices are now getting determined by demand and supply and the Budget numbers were lower than the market expectation, said Bhattacharya of Axis Bank. The yields, in fact, fell on Thursday after the US Federal Reserve kept its policy rates unchanged. Yields on the 10-year bond closed at 7.52 per cent, compared with its Wednesday close of 7.58 per cent. In reaction to the Fed policy review, the rupee rose sharply to close at a more than two-month high of 66.75 a dollar. It had closed at 67.24 on Wednesday.
Even before the advance tax outflow started, the liquidity shortage was Rs 1.49-1.66 lakh crore. “This year, the tightness has been extraordinary,” said Saugata Bhattacharya, chief economist at Axis Bank.
China’s exchange rate adjustment in January meant investors from emerging markets liquidated their portfolio aggressively. India saw equity outflow of nearly $2.5 billion in about a fortnight in January, even as fresh debt flows didn’t come in as the (government-set) limits were mostly filled.
That created a lasting hole in liquidity, which got accentuated as the government refused to part with its cash balances kept with RBI. These were Rs 1.2 lakh crore in December after the advance tax outflow, which the government did not spend immediately. The surplus cash balance of the government meant for auction, estimated at 70-80 per cent of the total cash balance, was Rs 1.3 lakh crore.
However, RBI has said it is ready to pump the liquidity needed to keep call money rates anchored around the repo rate. The central bank has stepped up its bond buying programme from the secondary market and has so far done three bond purchases under its open market operations (OMOs). On Thursday, RBI purchased Rs 14,409 crore of bonds from the market.
RBI might have to do more OMOs to ease liquidity, said Soumyajit Niyogi, associate director at India Ratings. Also, the government might opt to redeem its bonds prematurely to ease the liquidity pressure, he said. However, once the government starts spending its cash balances, the system might become liquidity-surplus, Niyogi said.
Bond yields though, might not get impacted by much, as bond prices are now getting determined by demand and supply and the Budget numbers were lower than the market expectation, said Bhattacharya of Axis Bank. The yields, in fact, fell on Thursday after the US Federal Reserve kept its policy rates unchanged. Yields on the 10-year bond closed at 7.52 per cent, compared with its Wednesday close of 7.58 per cent. In reaction to the Fed policy review, the rupee rose sharply to close at a more than two-month high of 66.75 a dollar. It had closed at 67.24 on Wednesday.