April 14, 2017

The Reserve Bank of India is likely to mop up additional liquidity in the next two to three weeks from the banking system through reverse repo auctions and issuances under the market stabilisation scheme, traders and economists said.

The central bank accepted bids worth Rs 80,655 crore rupees at its variable rate reverse repo auction held on Thursday, and late in the evening, announced sale of T-bills worth Rs 1 lakh crore under the market stabilisation scheme.

The excess liquidity in the banking system stands at about Rs 4.3 lakh crore. In February, the central bank changed its stance to ‘neutral’ from ‘accommodative’ and the liquidity in the system will have to be aligned to the new stance, traders said. “With so much of excess liquidity in the market, bond yields can crash. The RBI’s aim is to stabilise the bond market and provide better returns to the banks,” said Madan Sabnavis, chief economist of credit rating agency CARE.

Banks witnessed their deposits swell after the government had banned currency notes with denominations of Rs 500 and Rs 1,000 in November last year. Robust foreign inflows into Indian debt and stocks have also added to the liquidity. Foreign portfolio investors have poured in close to $1.8 trillion since the beginning of the fiscal.

“The pace of increase in currency circulation and the durability of foreign inflows is what the RBI is closely watching,” said Upasna Bhardwaj, economist at Kotak Mahindra Bank. While the pace of currency in circulation will increase gradually, it is likely to stabilise at a level lower than the pre-demonetisation levels, she added.

The excess liquidity in the system has also caused a rally in the short-term government bond, with short-term yields trading lower than the 10-year benchmark yield. The yield on the 91-day and 181-day T-bills closed below 6% on Thursday, while the benchmark yield ended at 6.82%.

[The Financial Express]