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Flow of RIB proceeds, RBI moves expected to impact banking liquidity

Liquidity in the banking system for the current month will largely depend on the timing of cash flows from the kitty of Resurgent India Bonds of State Bank of India and subsequent measures from the Reserve Bank of India to even out short-term mismatches of demand and supply.

According to leading funds managers and analysts, September would otherwise be a relatively tight month with no significant bond redemption inflows but with significant outflows in the form of advance corporate tax in the region of Rs 70 billion. The possibility of further dated security auctions to complete the remaining of Rs 233.55 billion of the borrowing programme remained a constant pressure on short term liquidity, they said.

Analysts said the RBI may keep domestic liquidity tight to preempt any fresh bout of currency weakness and particularly since the impact of raising short term rates through a percentage cut in cash reserve ratio hike and a three per cent repo rate hike has been short-lived.

While demand for funds is expected to improve gradually, a sharp and sustained increase in credit pick-up during the busy season could put an upward pressure on interest rates in the later half of the year.

The month of August demonstrated that volatility at the short-end of the yield curve is critically dependent on the foreign exchange situation where the Indian rupee is being affected by the weakness of Asian currencies abroad.

Comparing end-August spreads with July-end, funds managers said, the spreads between treasury bills and rated commercial papers increased in the three-month maturity bucket and beyond 100-days, there was a relative flattening of the spread curve. The volatility at the extreme short-end can be attributed to the selective liquidation of money market instruments following the tightness arising out of the RBI measures.

Bond prices which suffered as expectations of short term funding rates turned volatile, regained to an extent as most leveraged positions were covered by a combination of the RBI refinance, reduced subscription to treasury bill auctions and term borrowing.

The sentiment in bond market would be contingent on quantum and manner of deployment of RIB rupee proceeds.

The manner of deployment of rupee resources of around Rs 100 billion to Rs 110 billion from RIB proceeds in the next one month would be crucial not only to bond yields, but also in maintaining the interest rate and currency movement in a stable groove, they said.

Expressing cautious optimism on stability of the rupee, analysts hoped that the RBI should ensure that no indirect investment route leads to the foreign exchange market and create disturbances.

UNI