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Informist, Friday, Jan. 10, 2025

 

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--Mkt sources: RBI met select bank treasury heads, PDs Thu
--Sources: Mkt players sought RBI liquidity measures to ease cash crunch
--Sources: Mkt suggested CRR cut, OMO buy, FX swap to ease liquidity strain
--Sources: RBI officials didn't respond to mkt requests for liquidity steps
--Sources: Market players sought clarity on RBI's FX intervention strategy
--Sources: Mkt asked RBI to reduce volatility in near-term FX forwards
--Sources: PDs asked RBI for liquidity backstop facility amid cash crunch
--Sources: Mkt sought longer-term VRRs as interim step for liquidity strain
 

 

By Aaryan Khanna, Pratiksha, and Pratigya Vajpayee

 

NEW DELHI/MUMBAI – Treasury heads of banks and primary dealers met officials from the Reserve Bank of India on Thursday and sought liquidity-easing measures from the central bank to address the persistent cash crunch in the banking system, market sources said. 

 

While some banks pitched for further reduction in their cash reserve ratio requirement, others suggested bond purchases under open market operations, and long-term dollar-rupee buy/sell swap auctions to ease the strain on liquidity.

 

"It was a routine meeting where the RBI mostly heard the market out," a bank treasury official said. "Liquidity is the major pain point right now. People sought clarity on whether the current tightness is by design, or is it transient, and for how long is it expected to last."

 

RBI officials from the Financial Markets Operations Department and the Financial Markets Regulation Department were present at the meeting, which is typically a quarterly one convened by the central bank, market sources said. The central bankers did not respond to any of the suggestions given. Despite its routine nature, the latest meeting was of significance due to the fall in durable liquidity in the financial system and the recent volatility in the foreign exchange market. The prolonged spell of tight liquidity had led to speculation that the central bank is deliberately refraining from easing liquidity conditions to limit pressure on the depreciating rupee.

 

Durable liquidity, which includes the government's cash balances, has fallen to INR 660 billion as of Dec. 13, the lowest since April 2023. The RBI's net liquidity injection into the banking system--a proxy for the liquidity deficit--was at INR 2.01 trillion on Thursday, and had climbed to a seven-month high of INR 2.43 trillion in December.

 

Banks have requested for the cash reserve ratio to be brought down as low as 3%, the level where it was during the COVID-19 pandemic, when the RBI extended emergency policy accommodation, market sources said. The RBI had cut this requirement by 50 basis points in two tranches in December, to the current 4% of net demand and time liabilities.

Should the RBI not want to deploy the potent monetary policy tool of CRR, the other measure that market participants suggested was large-scale open market government bond purchases through a series of auctions, sources said. The RBI has not bought gilts at auction since October 2021, and its screen-based purchases have been minuscule as of Dec. 27. With the shrinking forex assets, treasury officials said this would allow the central bank to add domestic assets to its balance sheet, while directly injecting cash into the banking system. The central bank has been actively selling dollars in the domestic spot market to prevent sharp depreciation in the Indian unit.

 

The rupee has slid over 2% over the last two months, doubling the fall seen in the prior year. Since November, the dollar/rupee 1-year forward premium has jumped over 40 basis points to 2.70%, while near-term forwards have been volatile due to the RBI's interventions in the forex market to limit the rupee's fall.

 

The central bank has been sporadically conducting dollar/rupee buy/sell swaps of one- to three-month maturities since early December. However, banks called for longer-term measures for more durable liquidity support. Given that spot dollar sales drain liquidity from the banking system, a buy-sell swap helps to replenish liquidity. A buy/sell swap entails buying dollars for immediate delivery and entering into a contract to sell these at a future date, thereby postponing the drain on systemic liquidity.

 

"While the RBI decides on the durable liquidity measures, one of the asks was that there should be adequate liquidity support through variable rate repos," a second bank treasury official said. "Banks want adequate liquidity to sustain, through bigger quantums of VRRs and even introducing longer-term VRRs." 

 

Primary dealerships who were part of the meeting requested a liquidity backstop facility from the RBI as a source of emergency funding amid the ongoing liquidity crunch. As overnight interbank lending and market repo rates have climbed beyond the RBI's Marginal Standing Facility rate, primary dealers also sought to be included in either the MSF window or receive a similar facility, market sources said. 

 

Market players also sought a clarity about the RBI's intervention strategy in the foreign exchange market going forward. The rupee's sharp fall ever since Sanjay Malhotra took over as the RBI governor on Dec. 11 has fuelled speculation about a shift away from the central bank's earlier approach of zero-tolerance for currency volatility.

"It has been a bit turbulent for the rupee off late and nobody was expecting a sudden shift in the (RBI's intervention) strategy. So, people just wanted to know if we are looking at more volatility or this phase was a temporary one," said a bank treasury official. "Everybody wants to be prepared for it." Some banks voiced to the central bank that depreciation in the rupee was not a concern until and unless it was in an orderly fashion. 

Banks also requested the RBI to reduce volatility in the near-term dollar/rupee forward rates, sources said. Near-term forwards have been extremely volatile since last month owing to a surplus dollar in the system on the back of the RBI's aggressive supply of dollars in the foreign exchange market and tight rupee liquidity. The implied cash-tom rate, or the premium paid for exchanging dollars for rupees on an overnight basis, was at around 7.1% on Thursday, almost 100 basis points higher than where it was at the end of November. Rates climbed as high as 11% in mid-December.  End

 

US$1 = INR 85.89

 

Edited by Akul Nishant Akhoury

 

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