Overnight at 6.50% – Apna Time Ayega!
There was a time when system liquidity was 3.4 lac cr in deficit. Then there was a VRR. Then another. And yet another. Sometimes they did it twice a day ! They even bought USD. The powers that be said in so many words that they would like to see overnight hang out at 6.50% with the Repo Rate. The self proclaimed market oracles, (I am guilty as well!) even said that this is a surrogate rate cut.
But alas it’s 10 days since the MPC and liquidity is still 2 lac cr in deficit and overnight is flirting with 6.75% again. Economists,who know such things tell us that it’s only SYSTEMIC liquidity that is in deficit. CORE liquidity is still surplus. The difference apparently is the cash that the Sarkar is keeping with itself.
Why is the govt. not releasing these funds? Elections are round the corner and normally that leads to a surge in spend. Well North Block is rightly being fiscally prudent. I imagine they want to keep the books in ship shape at least till the fiscal year end as promised in the Budget.
So what are the options for getting the systemic liquidity back on even keel? There are a few besides the tried VRRs
1. A temporary Decremental CRR. Opposite of the I-CRR. Short term CRR cuts until the govt spend kicks in post March end.
2. A stand by line of credit to banks at the Repo Rate. This also helps in transmission since many loans are linked to Repo but actual overnight is higher leading to a basis risk.
3. A more longer term solution is ofcourse OMO Bond purchases. These could be shorter tenor bonds or maybe even T Bills if permitted.
A 100k purchase of up to 1 yr bonds and bills at around 6.75% will pump in liquidity and cause the front end of the curve to collapse.
The much read Para 21 of the Guv’s statement also reinforces this. The policy stance is through rates. That has not changed. The withdrawal of liquidity stance is transmission and inflation driven. The two are connected but don’t necessarily have to work in tandem. The sweet spot for systemic liquidity seems to be +/- 1 lac cr. That apparently ensures pass through of rate hikes while keeping prices down.
Monetary calendar.
March : Overnight anchored at 6.50%
April : Dovish MPC
June : Stance change
Aug : Rate cut
Maybe it will be a shallow rate cut cycle but we will see ‘lower for longer’. With Japan and UK in near recession and China imploding, global rates cannot spiral back up in a hurry.
Even the Fed despite facing a red hot economy will be wary of another hike. Best case for them will be to stay on hold longer. India may need to front run the Fed especially if rates start collapsing in China.
Rates are headed lower and will stay low for a while. The Year of the Bond is getting started.