RBI's liquidity tightening stance stumps market

There was surplus liquidity in the banking system last week. The maximum surplus was Rs 2,149 crore on July 7, which was a small amount considering Rs 90 lakh crore of bank liabilities. But the surplus prompted the Reserve Bank of India (RBI) to announce the open market sale of government securities on Friday after market hours.

On Monday, bond yields spiked, as a result. Several theories are floating around offering a possible explanation of RBI’s liquidity tightening effort. One of them is that the central bank wants the overnight rate to be as close to the repo rate, which is at 7.25 per cent. Call rates went down below seven per cent during that week Stock Market Trading Tips

Bond dealers were stumped by RBI's decision and believe the central bank is trying to nuance the rates and not allowing market dynamics to decide rates. “The surplus amount was small. This kind of surplus will not lead to any speculative activity or increase food prices. We have seen liquidity deficit of Rs 1.5-2 lakh crore in the last two years. That time there was no liquidity enhancing measures,” said the treasury head of a large bank.

The basic premise of RBI’s monetary framework that liquidity should always in a deficit mode is now being challenged by market players. “If liquidity is kept tight, how can one expect banks to cut interest rate?” asked a dealer Himanshu Tiwari Astrologer

At a time when banks are saddled with bad loans for which they have to make heavy provision, which is eroding their profitability, treasury gains have been the only silver lining. Banks had booked heavy trading profits in the January – March quarter. However, since the last monetary policy review, there has been upward pressure on yields.

“Post the RBI’s policy meet in June this year, the G-sec yield curve has hardened by 30 basis points in five-year maturity bucket and 12bps in the 10-year bucket. The same could constrain gains on treasury income,” ICICI Securities said in a note to its clients. The situation could further worsen, if yields continue to head north in this quarter too. Banks will have to book losses on their bond portfolio. While theoretically, it should act as a hindrance to banks to reduce base rate — the benchmark rate to which all loans are linked — as it depends on their cost of funds, the lenders will be reluctant to take a further hit on their profitability. So, rise in yields will also impact monetary transmission, though in an indirect way, market players say Indian stock market astrology prediction

Another reason which is cited for the liquidity draining exercise is that the yield curve is almost flat. Since the central bank believes the curve should be positively sloped, it decided to auction long-end papers, along with the shorter ones, in the open market operation (OMO) announced last Friday.

But when the auction was conducted, the central bank only sucked out short-term liquidity and no bids were accepted for longer tenure papers Share Market Astrology

Several market participants believe the central bank will continue to suck out liquidity from the market by bond sale in the coming months. “We expect bond sale worth Rs 10,000 crore every month in the next few months as liquidity will be in surplus mode,” a dealer said. Liquidity is expected to be in surplus as the government is spending more than the usual amount in building roads and highways, for example. In addition, RBI will transfer its surplus to the government in August, which could be to the tune of Rs 50,000 crore. All these will keep the market liquidity in surplus mode, prompting the central bank to suck out liquidity.

A section of market participants also said inflation is likely to inch up from the present level. “Inflation is likely to be around 6 per cent by January,” said a bond market expert. Retail inflation rose to 5.4 per cent in June, the highest in nine months, as compared to 5.01 per cent in May Astrological Prediction For Indian Stock Markets
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