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Informist, Friday, May 16, 2025

 

--Sources: FIMMDA members comfortable with RBI's OMO buys ending soon

--Sources: FIMMDA held meet Thu to discuss recommendations to RBI before MPC

--Sources: Some members asked FIMMDA to recommend CRR cut in June policy

 

By Pratiksha and Aaryan Khanna

 

NEW DELHI – Members of the Fixed Income Money Market and Derivatives Association of India recommended that the body not ask the Reserve Bank of India to continue government bond purchases under its open market operations, according to five officials who attended an internal meeting of the association Thursday. As an alternative, some participants suggested FIMMDA ask the central bank to cut the cash reserve ratio for banks for the next phase of liquidity infusion.

 

The self-regulatory body's meeting discussed recommendations to and asks from the RBI in the run-up to the June monetary policy review. The final recommendation would be made by FIMMDA's executives, either from the board or the chief executive officer, to the central bank next week, officials said.

 

"It was a routine meeting, but both OMOs and CRR cut were discussed," one of the officials who attended the meeting said. "People were happy with the size of the OMOs that have been conducted already, and the sentiment was broadly that we have had enough for now, there should not be a demand for more. For June, there was some discussion of asking for a CRR cut now."

 

The RBI has purchased a larger quantum of gilt under its OMO auctions than the market has expected in both April and May, which has turned interbank liquidity into a surplus averaging over INR 1.5 trillion this month. Last month, the RBI bought INR 1.2 trillion worth of gilts at OMO auctions, and then said it would buy another INR 1.25 trillion of bonds under such auctions in May. In total, the central bank has bought INR 4.65 trillion worth of gilts through OMO auctions and INR 388.25 billion of bonds in the secondary market since January--with another INR-250-billion auction slated for Monday.

 

Moreover, durable liquidity–which includes banking system liquidity and the government's cash balance–has zoomed to an over INR 2 trillion surplus as of Apr. 18 from a deficit in February. It is yet to reflect some of the RBI's recent purchases, which will likely take the current surplus to around INR 3 trillion, according to economists' estimates. Adding in the RBI's surplus transfer to the government, which is seen around INR 3 trillion, durable liquidity may total almost INR 6 trillion by the end of the month.

 

RBI Governor Sanjay Malhotra had indicated the central bank's comfort on surplus durable liquidity at 1% of banks' net demand and time liabilities, which is around INR 2.5 trillion. With the Monetary Policy Committee in the middle of a rate-cutting cycle, the central bank may keep liquidity surplus higher than that to ensure a quicker transmission of rate cuts, though market conditions do not warrant a consistent surplus at the level that may prevail by May-end, dealers said. 

 

Thus, the calls for a cash reserve ratio cut were not widespread and only from a few banks, officials said. The RBI had last cut the cash reserve requirement by 50 basis points to 4.5% of net demand and time liabilities in December, which added INR 1.16 trillion of durable liquidity at the time. Instead, there was more consensus at the meeting over the OMOs ending, with a potential restart later this year should liquidity so merit, they said. The aggressive OMOs have resulted in the market not absorbing any gilt supply in 2025 on a net basis–the RBI has bought over INR 5 trillion of gilts through OMOs, while the government has only net issued INR 4.6 trillion of papers this year.

 

"It is not a major concern for banks yet because deposit and lending activity is still slow, but essentially the supply of G-sec has been non-existent," another official said. "In the March quarter, a lot of people replaced the G-sec with state bonds, and since then there has been profit booking. But ultimately the market does need fresh supply to function smoothly."

 

The supply-demand mismatch created by the central bank's purchases is a key reason why the 10-year benchmark gilt yield is down 50 bps year-to-date. The other reason is the beginning of repo rate cuts in India, with expectations of a deeper rate-cut cycle in 2025. A 25-bps repo rate cut to 5.75% is widely expected at the June Monetary Policy Committee meeting and any measures recommended on liquidity would come on top of that, officials said.  End

 

Edited by Tanima Banerjee

 

 

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