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Informist, Friday, Feb. 14, 2025

 

By Vidhushi RajPurohit

 

MUMBAI – The Reserve Bank of India has not yet fully administered the liquidity-boosting measures announced on Jan. 27, but there is already a clamour for the central bank to do more, with the gilts market displaying underlying bullishness as it expects open market bond purchases to be the path Mint Street decides to tread.

 

Since Jan. 27, the RBI has infused as much as INR 2.29 trillion of liquidity--excluding its daily variable rate repo operations--through OMO purchases via auctions, multiple long-term repos, and a dollar/rupee buy/sell swap. Add the INR 388.15 billion of gilts bought by the central bank via screen-based trading in 2025, the INR 1.16 trillion of infusion from December's Cash Reserve Ratio cut, and next week's scheduled OMO buy of INR 200.00 billion and the total liquidity added in the last two months would be a massive INR 4.04 trillion.

 

And yet, the RBI's actions have not been enough thanks to its mind-boggling dollar sales. The size and pace of the forex interventions have pushed dealers to speculate not just about whether next week's OMO auction size will be doubled but also when further such auctions will be announced. According to market participants, the RBI has likely sold nearly $20 billion in the spot market this week--draining close to INR 1.75 trillion of rupee liquidity--to prop up the rupee, with large sales on Tuesday helping the rupee log its largest intraday gain in over two years.

 

"The market is bracing for a significant liquidity injection by the RBI given the existing core liquidity deficit and uncertainty surrounding its forward dollar delivery position," V.R.C. Reddy, head of treasury at Karur Vysya Bank, said. "Expectations are high that the RBI will double the next OMO to INR 400 billion and continue with subsequent auctions to infuse liquidity."

 

The RBI's already-large outstanding sales of forward dollars are likely to have risen even further last month as the central bank continued to sterilise its interventions in the spot market. The RBI's net outstanding forward sales, which comprise offshore non-deliverable forwards and onshore forward positions were at $67.94 billion at the end of December.

TIGHTER CONDITIONS

In light of the geopolitical and trade uncertainties, market participants expect the RBI to keep a tight hold on the rupee. This will require the central bank to keep stepping in and ease systemic rupee liquidity conditions to transmit last week's repo rate cut.

 

"Day-to-day liquidity is managed through VRRs (variable rate repos) but then from one hand it (RBI) is trying to infuse funds and then the next second we see it draining that," a dealer at a private bank said. "For now, the liquidity seems to be as much a priority as the rupee... We can expect more interventions and more infusion then."

 

Liquidity conditions have been so tight that overnight money market rates have remained above the repo rate this week. On Thursday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit--was INR 2.42 trillion, up from INR 1.08 trillion on Feb. 7. Crisil's Financial Conditions Index dropped below zero in January for the first time in 22 months, indicating tighter financial conditions. And that was in January, before the recent spell of heavy dollar sales. According to Reddy, the RBI will likely prioritise the provision of sufficient liquidity to ensure effective transmission of its rate cut.

 

To be sure, OMO purchases will not be the only tool the RBI is likely to use to offset its spot forex interventions. Traders expect variable rate repo auctions with durations of 28 days or more to be consistently announced by the central bank in the coming days and weeks to help tide over the typically strenuous liquidity requirements in March. With the schedule of major outflows such as advance tax payments already known, the RBI is expected to be proactive rather than reactive to deal with the liquidity pressure. However, the liquidity deficit may remain.

 

The circumstances have pushed short-term bonds out of favour, with bonds maturing in five years or more benefitting from the OMO purchases. State-owned banks have sold held-to-maturity stock maturing in 2030-2037 to the central bank at these auctions and replaced them with both liquid and illiquid securities of similar tenures.

 

The larger the central bank's open market purchases become, the greater the distortion will be in demand and supply, with the Centre's weekly auctions set to end at the end of February. Should the OMO purchases continue, the RBI's favoured bonds will gain sharply while bond yields in other tenures may stagnate, dealers said.  End

 

US$1 = INR 86.82

 

Edited by Saji George Titus

 

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