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No broadbased reduction in rates due to RBI liquidity measure


Mumbai: The Reserve Bank of India‘s (RBI) step normalisation of liquidity operations by announcing a 14 day reverse repo auction will lift overnight market interest rates, but it is unlikely to translate into hardening of rates across the tenors as the central bank is set to continue with surplus liquidity stance to revive credit growth.

Interest rates have come down sharply following RBI’s rate cuts to deal with the economic uncertainties due to the Covid 19 pandemic and the RBI’s move is seen by market participants as the first step towards restoring normalcy.

“I would have liked this move to have come a month or two earlier but better late than never. It can be seen as the first step towards normalisation of rates but that is pretty far away right now since RBI is committed to support growth. This move will also go with the cash reserve ratio (CRR) cut reversal expected at the end of March,” said Ashish Vaidya, head of treasury at DBS Bank India.

In response to the economic uncertainties due to the Covid 19 pandemic the RBI had cut the CRR, the amount of deposits banks park with the central bank without interest, by 100 basis points from 4% to 3% effective for a year from the fortnight beginning March 28, 2020. With the reversal likely in March more than Rs 1 lakh crore of liquidity will be impounded by the RBI. One basis point is 0.01 percentage point.

Bankers said the RBI’s move is logical since short term rates were being dealt at very low levels without any reason. In the past two months, interest rates in the overnight market fell to a low of 3.10%, making the RBI’s reverse repo rate of 3.35% ineffective and much below the central bank’s benchmark 4% repo rate. In the overnight market where mutual funds also participate, the rate dropped to 2.57% earlier in December.

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“We have had companies raising one year commercial papers at closer to 3% which is the lowest in a long time. With this move some banks who are sure of their liquidity position will be able to keep their excess money for a longer 14 day which will suck out some money. This is a normalisation which was expected,” said Harihar Krishnamurthy, head of treasury at FirstRand Bank.

However, any further liquidity measures would be determined by the foreign exchange flows. Between January and October last year, the RBI net bought $73.40 billion through spot market intervention, which has nearly doubled from the whole of 2019, shows data from RBI. Spot market intervention through dollar purchases releases rupees into the banking system, which has now a surplus of about Rs 5.9 lakh crore.

RBI has been buying dollars this fiscal to sterilise foreign portfolio inflows have netted $29.24 billion in Indian securities this fiscal. As a result Mint Road’s forex reserves have swelled to a record high of $585 billion which some bankers are questioning.

“We used to talk about have enough reserves to cover for six to eight months of imports but our reserves now cover for 20 months of imports so I do not understand this continous dollar purchases because it is not helping us in anyway and infact only funding the US deficit. Since the RBI wants to keep rates easy it is time it looks at how it handles the currency too,” said Vaidya from DBS Bank said.

The jury is still out on whether the RBI’s move will make any difference because the window is only open to banks and not to mutual funds and insurance companies who still have limited avenues to keep their extra cash. Also the fact that banks still have the option of keeping excess money overnight with RBI means that only a few banks will want to keep aside money for 14 days.

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Savers can now expect a little higher interest on their short term investments. “It should make short mutual fund schemes attractive over saving bank deposit,” said Soumyajit Niyogi, associate director at India Ratings. “While overnight to short term rates will likely rise, long term rates would be little changed. This move has marked cessation of ultra easy monetary policy.”

It remains to be seen how much RBI garners and how much of an impact this move has on market sentiment.





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