RBI to spark money market recovery by reverse repo operation worth Rs 2 trn

January 11, 2021 0 By boss

India’s key money-market rates and yields on short-term debt are set to rise after the central bank took its first small step to unwind emergency pandemic measures.

The will aim to drain 2 trillion rupees ($27.3 billion) of banking funds via a 14-day reverse repo operation on Jan. 15, the central bank said in a statement late Friday. This is the first move in a phased normalization of the central bank’s liquidity operations, it said.

There has been growing consensus among traders that the will have to start draining excess cash, as surging liquidity caused money-market rates to drop below the central bank’s interest-rate corridor and distort asset pricing. Quantum Asset Management Ltd. and IDFC Asset Management Ltd. have been among those forecasting that short-end rates will rise faster than the long-end as a result, though nobody expects the central bank to abandon its easy policy.

The announcement is “a clear signal from the central bank that it wants to slowly start the process of exiting from the extraordinary accommodation that remains in place,” said Kaushik Das, chief economist for India at Deutsche Bank AG. “The central bank wants to nudge the various short-term interest rates to converge to the gradually.”


The assured markets in last week’s statement that it will continue to ensure adequate liquidity. Excess cash in the banking system is currently around 6.7 trillion rupees, according to the Bloomberg Economics India Banking Liquidity Index.

Yields on one- to three-month bills could rise as much as 15-18 basis points, while those out to one year could climb 10 basis points, according to Madhavi Arora, lead economist at Emkay Global Financial Services Ltd.

The crash in short-term rates raised the risk of distortions in banks’ pricing of assets, and a further steepening of India’s yield curve, which is a concern for policy makers.

After the initial market reaction to the RBI’s statement, attention will turn to Friday’s reverse repo auction. The cut-off rate at which the central bank accepts bids will be a key signal of the interest-rate trajectory, according to a Kotak Mahindra Bank note.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Source link