 "Liquidity deficit expected to ease")
The daily liquidity deficit of around Rs 1 lakh crore in the last six months is set to ease in the first half of the current financial year, which began today.
Market participants expect open market operations (OMOs) by the Reserve Bank of India (RBI) to buy government bonds and muted credit growth in the first half (April-September). "The daily average liquidity deficit will be around Rs 75,000 crore in the first half," said Indranil Sen Gupta, India economist at Bank of America Merrill Lynch. In 2012-13, the daily average deficit was Rs 84,115 crore; in the last six months, the daily average had risen to Rs 96,647 crore. In the first half, it was Rs 71,687 crore.
"We are expecting OMOs to the extent of Rs 60,000-70,000 crore in the first half. In April-May, Rs 50,000-55,000 crore will leak out of the system as currency with the public. Most of this will need to get offset by way of OMOs," said Suyash Choudhary, head-fixed income, IDFC Mutual Fund.
He expects OMOs from May, as the government has exited March with a surplus of Rs 70,000 crore with RBI and a large part of it will be spent in the next 10-15 days. The spending will help to bring down the liquidity deficit into RBI's comfort zone of plus or minus one per cent of banks' net demand and time liabilities. But by mid-April onwards, currency with the public will start to kick in. Due to this, by May, the daily liquidity deficit will again start heading to Rs 1 lakh crore, which is when Choudhary thinks RBI will start OMOs.
Some feel the quantity of OMOs could be more. "There will be OMOs of around 75,000 crore in the first half. For the entire fiscal, there will be OMOs up to Rs 1,50,000 crore. The liquidity deficit in the first half may not be that high, as it is a lean credit period," said N S Venkatesh, chief general manager and head of treasury, IDBI Bank.
RBI had conducted an additional Liquidity Adjustment Facility (LAF) on Thursday, Saturday and Sunday (Friday was a bank holiday). Banks had parked surplus funds worth Rs 34,395 crore and Rs 23,715 crore on Saturday and Sunday, compared to a borrowing of Rs 1,74,745 crore on Thursday, the highest in 2012-13.
As the liquidity deficit is set to ease, it will help to bring down short-term rates. "Short-term rates in the first half will fall substantially and there will be steepening of the yield curve. On an average, short-term rates will fall by 25-50 basis points in the first half," said Venkatesh.
Thursday was the last trading day of the previous financial year for short-term debt instruments such as certificates of deposit (CD) and commercial paper (CP). One-month CD and CP rates ended at 10.05 per cent and 9.98 per cent, respectively.
Market participants expect open market operations (OMOs) by the Reserve Bank of India (RBI) to buy government bonds and muted credit growth in the first half (April-September). "The daily average liquidity deficit will be around Rs 75,000 crore in the first half," said Indranil Sen Gupta, India economist at Bank of America Merrill Lynch. In 2012-13, the daily average deficit was Rs 84,115 crore; in the last six months, the daily average had risen to Rs 96,647 crore. In the first half, it was Rs 71,687 crore.
"We are expecting OMOs to the extent of Rs 60,000-70,000 crore in the first half. In April-May, Rs 50,000-55,000 crore will leak out of the system as currency with the public. Most of this will need to get offset by way of OMOs," said Suyash Choudhary, head-fixed income, IDFC Mutual Fund.
He expects OMOs from May, as the government has exited March with a surplus of Rs 70,000 crore with RBI and a large part of it will be spent in the next 10-15 days. The spending will help to bring down the liquidity deficit into RBI's comfort zone of plus or minus one per cent of banks' net demand and time liabilities. But by mid-April onwards, currency with the public will start to kick in. Due to this, by May, the daily liquidity deficit will again start heading to Rs 1 lakh crore, which is when Choudhary thinks RBI will start OMOs.
Some feel the quantity of OMOs could be more. "There will be OMOs of around 75,000 crore in the first half. For the entire fiscal, there will be OMOs up to Rs 1,50,000 crore. The liquidity deficit in the first half may not be that high, as it is a lean credit period," said N S Venkatesh, chief general manager and head of treasury, IDBI Bank.
RBI had conducted an additional Liquidity Adjustment Facility (LAF) on Thursday, Saturday and Sunday (Friday was a bank holiday). Banks had parked surplus funds worth Rs 34,395 crore and Rs 23,715 crore on Saturday and Sunday, compared to a borrowing of Rs 1,74,745 crore on Thursday, the highest in 2012-13.
As the liquidity deficit is set to ease, it will help to bring down short-term rates. "Short-term rates in the first half will fall substantially and there will be steepening of the yield curve. On an average, short-term rates will fall by 25-50 basis points in the first half," said Venkatesh.
Thursday was the last trading day of the previous financial year for short-term debt instruments such as certificates of deposit (CD) and commercial paper (CP). One-month CD and CP rates ended at 10.05 per cent and 9.98 per cent, respectively.