RBI may need to buy $18 bn of bonds to boost liquidity, says B. Prasanna of ICICI Bank
The central bank may cut the cash reserve ratio by half a point in the second half of the fiscal and start buying bonds in the December quarter to keep banking liquidity at current levels
The Reserve Bank of India (RBI) may buy nearly $18 billion of government bonds to replenish banking liquidity that’s expected to tighten later in the year, according to a report by Bloomberg.
The central bank may cut the cash reserve ratio by half a point in the second half of the fiscal and start buying bonds in the December quarter to keep banking liquidity at current levels, said B. Prasanna, group head for global markets sales, trading and research at ICICI Bank Ltd in an interview with Bloomberg.
The liquidity in banking system is expected to tighten as higher spending amid state elections due later in the year may lead to money leaving the system. Key states like Rajasthan, Madhya Pradesh and Chhattisgarh have elections due, and that will coincide with the busy credit season in October when demand picks up in the economy.
“The currency in circulation will remain high due to a number of state elections and national elections next year,” Prasanna said. “The currency coming in will go out as people take out the cash.”
Excess liquidity in the banking system has narrowed to about ₹740 billion from this year’s high of about ₹3 trillion in April, according to data compiled by Bloomberg Economics. RBI injected about 468 billion rupees into the banking system on May 19 via a repo auction, the first such injection since March.
Still, some lenders like Kotak Mahindra Bank Ltd. have said the RBI’s withdrawal of the highest value 2,000 rupee notes from circulation this month will replenish liquidity and lower the probability of bond purchases in the fiscal second half.
The move is expected to add about one trillion rupees of banking liquidity, according to estimates. It follows the RBI’s higher-than-expected dividend payout to the government, which may also boost cash in the system.
The current liquidity addition has brought down funding rates, creating scope for a rally in notes maturing in five years and less, Prasanna said. The 5-year yield may drop to 6.8% levels, while the one-year treasury bill can fall to 6.75%, he said. The 10-year bond doesn’t have much scope for rally now with interest rates expected to having peaked, he added.
Following are some other key views:
- The RBI should keep surplus liquidity at 1-1.5 trillion rupees if it wants to maintain a marginal surplus in the current era of liquidity management
- The first rate reduction may happen in February. It may be a shallow cut cycle, but a 75-basis-point drop is possible
- Medium-term view on rupee remains positive on the back of strong remittances and service exports
- Short-term concerns remain on the rupee as traders who had gone long on the Indian currency are closing out the trades as the RBI prevented appreciation
(with inputs from Bloomberg)
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Business NewsNewsIndiaRBI may need to buy $18 bn of bonds to boost liquidity, says B. Prasanna of ICICI Bank
First Published:25 May 2023, 12:00 PM IST
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