MUMBAI: By the first half of the next year, liquidity in India’s financial system would come to a level that is consistent with the central bank’s stated neutral stance.
“Given the trends in currency in circulation, it is expected that system liquidity may reach neutrality in the first half of 2018,” said Viral Acharya, deputy governor of the Reserve Bank of India (RBI). “The RBI will continue to manage the evolving liquidity conditions through a mix of variable rate repo and reverse repo operations of various maturities. These are for handling short term liquidity fluctuations.”
Addressing the media after the RBI’s bi-monthly policy meeting, Acharya said: “We will also consider open market operations in case liquidity is required to be injected or absorbed.”
The benchmark bond yield dipped five basis points from its intra-day high, pushing prices up. It closed at 7.03% versus 7.06% a day earlier.
“With clarity on the liquidity stance, short-term bonds are likely to gain,” said Shailendra Jhingan, MD & CEO, ICICI Securities Primary Dealership. “There is no immediate risk of OMO sales by RBI in the near term and policy rates are going to remain stable next year. RBI will need to do more OMO sales in FY 19 of a similar magnitude to achieve neutrality.”
The banking system now has excess cash of more than Rs 1 lakh crore. It was as high as Rs 7.96 lakh crore a year ago, immediately after the note-ban programme was announced.
About Rs 1 lakh crore worth of market stabilisation bonds are maturing in March, releasing extra money into the system.
“Long bond yields would be more driven by demand supply equation and risk of extra borrowing would continue to weigh on the market,” Jhingan said.
The 10 year benchmark bond yield hovered in the 7-7.15% trading range.
Liquidity conditions continue to normalise during the year, said Acharya. Liquidity surplus in the banking system after the withdrawal of bank notes in November 2016 has since reduced.
“A sharp rise in short-term rates in the current situation of clogged GST credit is detrimental for weaker corporates, especially for SMEs,” said Soumyajit Niyogi, associate director, India Ratings. “Currently, the dilemma is that money market rates are going up and overnight rates have remained below repo rates.”