Note on RBI measures by Rajeev Radhakrishnan, CIO - Fixed Income, SBI Mutual Fund
Below the Note on RBI measures by Rajeev Radhakrishnan, CIO – Fixed Income, SBI Mutual Fund
A host of measures have been announced today that clearly lays out the immediate and pressing task facing the RBI. i.e., provide adequate liquidity support to the financial markets. With core liquidity being negative close to about Rs. 80,000 crores, there was clearly a need to add durable liquidity beyond the daily VRR auctions that largely addresses the frictional liquidity tightness in the banking system. Starting with the CRR cut announced in the last review, the daily VRR auctions announced couple of weeks ago and the screen-based OMO purchase conducted over last 2 weeks, the incremental measures announced provide confidence in returning normalcy to the money markets. These incremental actions would add about Rs. 1 trillion of core liquidity infusion and another Rs. 50,000 crores through a slightly longer-term repo auction crossing the quarter.
Beyond articulating the current policy priorities, this also may broadly shape the incremental policy actions from the RBI. Given the evolution of seasonality in currency circulation and the current muted inflow expectations through the portfolio route, it clearly requires a series of such core liquidity infusion measures to sustain overnight settings around the policy repo.
Rate and prevent undue stress in the funding markets. A prolonged period of such tightening would have far higher negative implications on availability of funding and eventually on growth dynamics. Needlessly tightening financial market conditions given the overhang of pressures on the currency markets, possibly does not appear to be the policy choice at present and neither is that desirable.
While a gradual depreciation of the currency is what seems a likely path, the central bank would continue intervention to prevent any undue expectations on rapid weakening to build up. This would possibly require targeted interventions on both sides as well as active management of core liquidity. Clearly this sets the stage for further actions especially on the long term VRR and OMO purchase front. This should have a beneficial impact on the shorter end curve, both SLR and non-SLR. One should also expect that the steepening trend on the sovereign curve should remain intact and the bond curve to incrementally have a similar trend.
It could possibly be hasty to build in rate cut expectations in the February review as the broader growth inflation mix does not unambiguously call for the same. Having said that, this remains a close call and would clearly involve a subjective call with respect to the timing. Given that liquidity actions have a far direct and sustained impact, which has clearly been done, there is clearly merit in pushing back rate cuts possibly until there is more clarity on the external front as well as evolution of domestic growth inflation mix as well as liquidity conditions over the coming quarters. The April review possibly remains a better bet for the same. In the near term, the union budget should set the tone both for any potential fiscal actions to address consumption demand in the economy and to revive private sector investments.
Currently the bond market awaits a funding mix for financing the fiscal deficit, which should be broadly in line with this FY. While net borrowings should remain broadly in line with the current year, the gross supply numbers hinge a lot on the expected switches that may be done with the central bank in this FY and any buybacks that could be budgeted for FY26. Similar to the MPC outcome, one should be expecting a realistic number that addresses the requirement to smoothen the redemption profile over the years as well as one that ensures a well-matched demand supply balance and keeps central bank credibility and policy independence intact.
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