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As liquidity in the banking system continues to remain tight, a segment of the bond market is expecting open market operations (OMO) purchases from the Reserve Bank of India (RBI) in order to infuse durable liquidity.
Market participants said that if the government refrains from spending, the central bank might resort to other measures to infuse liquidity apart from variable rate repo (VRR) auctions.
“Given the current liquidity situation, the RBI might have to conduct OMO purchases or cash reserve ratio (CRR) cuts in order to ease liquidity conditions within the banking system if the government refrains from spending before elections,” said Sagar Shah, head of domestic markets at RBL Bank.
The six-member monetary policy will review the monetary policy next week on February 6-8.
At the same time, some believe OMO purchases at the moment might misguide the market, and the central bank should continue VRR auction to infuse liquidity. RBI is continuing the withdrawal of its ‘accommodative’ stance, and has not changed the stance to neutral even if liquidity has been in deficit for a few months now.
“OMO purchases are not really required. And they might just send the wrong signal. I think they will continue with VRRs,” said Vikas Goel, managing director (MD) and chief executive officer (CEO) at PNB Gilts.
The liquidity deficit in the banking system widened to Rs 2.68 trillion on Monday, according to the data by the RBI. It had widened to record Rs 3.46 trillion on January 24 on the back of tax outflows. The central bank has been conducting VRR auctions in order to infuse liquidity in the banking system. In the overnight VRR auction conducted by the RBI on Tuesday, bids were received for Rs 69,060 crore, against a notified amount of Rs 25,000 crore.
In the preceding VRR auctions, the central bank received a strong demand, with banks submitting bids ranging between 2.5 to 3.2 times the bidding amounts due to tight liquidity conditions in the system. Liquidity remained largely in a deficit mode in the third quarter. The central bank had conducted a VRR auction after six months on December 15.
“Given the current liquidity situation, the RBI might have to do more than VRR. The government is not spending and they are speculated to be hoarding around Rs 2-2.5 trillion,” said a dealer at a state-owned bank.
The central bank announced on Tuesday that they will provide an additional cumulative sum of Rs 5,000 crore to Standalone Primary Dealers (SPDs) through Standing Liquidity Facility starting Wednesday at the prevailing repo rate. The repo rate currently stands at 6.5 per cent.
Bond market participants are also expecting the RBI to change its stance to neutral and withdraw from the accommodative stance in the February policy review, citing continuous VRR auctions. This optimism stems from the perception that the central bank is adopting an accommodative approach towards liquidity. Jayanth Varma, an external member of the monetary policy committee, was the only one to recommend a neutral stance during the December policy review.
“Sustained tightness in the banking system liquidity could prove to be onerous for borrowers, and will worsen in case if the government spending does not accelerate in a meaningful way. Therefore, the infusion of durable liquidity is becoming necessary and idealistically, the monetary policy stance should change to ‘neutral’ from ‘withdrawal of accommodation’ to maintain consistency of stance and action,” said Soumyajit Niyogi, Director, Core Analytical Group, at India Ratings and Research.
“Given the current liquidity situation, the RBI might have to conduct OMO purchases or cash reserve ratio (CRR) cuts in order to ease liquidity conditions within the banking system if the government refrains from spending before elections,” said Sagar Shah, head of domestic markets at RBL Bank.
The six-member monetary policy will review the monetary policy next week on February 6-8.
At the same time, some believe OMO purchases at the moment might misguide the market, and the central bank should continue VRR auction to infuse liquidity. RBI is continuing the withdrawal of its ‘accommodative’ stance, and has not changed the stance to neutral even if liquidity has been in deficit for a few months now.
“OMO purchases are not really required. And they might just send the wrong signal. I think they will continue with VRRs,” said Vikas Goel, managing director (MD) and chief executive officer (CEO) at PNB Gilts.
The liquidity deficit in the banking system widened to Rs 2.68 trillion on Monday, according to the data by the RBI. It had widened to record Rs 3.46 trillion on January 24 on the back of tax outflows. The central bank has been conducting VRR auctions in order to infuse liquidity in the banking system. In the overnight VRR auction conducted by the RBI on Tuesday, bids were received for Rs 69,060 crore, against a notified amount of Rs 25,000 crore.
In the preceding VRR auctions, the central bank received a strong demand, with banks submitting bids ranging between 2.5 to 3.2 times the bidding amounts due to tight liquidity conditions in the system. Liquidity remained largely in a deficit mode in the third quarter. The central bank had conducted a VRR auction after six months on December 15.
“Given the current liquidity situation, the RBI might have to do more than VRR. The government is not spending and they are speculated to be hoarding around Rs 2-2.5 trillion,” said a dealer at a state-owned bank.
The central bank announced on Tuesday that they will provide an additional cumulative sum of Rs 5,000 crore to Standalone Primary Dealers (SPDs) through Standing Liquidity Facility starting Wednesday at the prevailing repo rate. The repo rate currently stands at 6.5 per cent.
Bond market participants are also expecting the RBI to change its stance to neutral and withdraw from the accommodative stance in the February policy review, citing continuous VRR auctions. This optimism stems from the perception that the central bank is adopting an accommodative approach towards liquidity. Jayanth Varma, an external member of the monetary policy committee, was the only one to recommend a neutral stance during the December policy review.
“Sustained tightness in the banking system liquidity could prove to be onerous for borrowers, and will worsen in case if the government spending does not accelerate in a meaningful way. Therefore, the infusion of durable liquidity is becoming necessary and idealistically, the monetary policy stance should change to ‘neutral’ from ‘withdrawal of accommodation’ to maintain consistency of stance and action,” said Soumyajit Niyogi, Director, Core Analytical Group, at India Ratings and Research.
