Incia C. bank’s liquidity withdrawal plan may present a risk for government bonds – analysts

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Incia C. bank's liquidity withdrawal plan may present a risk for government bonds - analysts

By Swati Bhat

MUMBAI, Jan.22 (Reuters) – India’s central bank, signaling its intention to drain some of the massive liquidity it has pumped into the banking system, faces a challenge if it is to avoid disrupting the country’s borrowing program. government, according to market participants.

The government is expected to present a massive borrowing plan in a February 1 budget snapshot for the fiscal year starting in April, aimed at reviving an economy that has shrunk significantly under the impact of COVID-19, reducing tax revenues.

This will complicate the Reserve Bank of IndiaThe task of withdrawing the huge excess cash it injected into the financial system to boost retail lending at the height of the pandemic, economists say.

“The authorities are walking a tightrope in gradual efforts to reduce the extent of excess liquidity while minimizing the backlash by (pushing) borrowing costs as the overall political bias remains accommodative,” Radhika said Rao, economist at DBS Bank.

The RBI’s problem was evident last week when it drained liquidity with a 14-day floating rate reverse repo auction, only to scare the market and push yields up on the curve, forcing the bank to reverse course with a purchase of bonds on the open market to calm investors.

“The RBI is well aware of the economic situation and will not rush to reverse the high level of liquidity in the system,” said a person familiar with RBI thinking. “But the measures taken last year were due to the exceptional conditions prevailing at the time, and it is only prudent to prepare and gradually restore things.”

The RBI has repeatedly stated that it will ensure sufficient liquidity in the banking system for lending to productive sectors and that it will ensure the smooth running of the government’s borrowing program, which will require monitoring returns.

The central bank said it is now looking to restore normal liquidity operations and announced the 14-day reverse repo while at the same time saying it will ensure sufficient liquidity if needed. The conflicting messages caused confusion in the market, leading to higher yields. later determined that the RBI was only looking to correct liquidity imbalances and not to tighten the liquidity supply.

They believe it will be months before the RBI can substantially reduce the average daily surplus of Rs 6 trillion ($ 8 billion) that banks park with the RBI.

But the surprisingly high threshold yield set in the 14-day reverse repo auction raised fears that the RBI could eventually raise the reverse repo rate. Traders said RBI should set lower thresholds in rolling auctions to allay these fears.

“They should continue to roll over these 14-day reverse repurchase agreements,” said Bekxy Kuriakose, head of fixed income at Principal Asset Management. “It helped anchor overnight rates close to the reverse repo.”

The market consensus is that the RBI will need to continue supporting the market through “twist” trading – buying and selling bonds simultaneously – and bond buying outright to avoid a spike in long-term yields. and help banks absorb the government’s new supply of debt. .

“Actions are needed to communicate that there will be no liquidity or financial crunch,” said Madhavi Arora, economist at Emkay Global Financial Services. “We are still a long way from this state, which is neither optimal nor desirable at present.” ($ 1 = 73.0000 Indian rupees)

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