Business & Investment

RBI liquidity indicators do not cause widespread declines in interest rates

Mumbai: Reserve Bank of IndiaNormalization of the Liquidity Operations (RBI) step by announcing a 14-day reverse repo auction lifts the overnight market Interest levelHowever, as the central bank is set to maintain a surplus liquidity stance to revive credit growth, it is unlikely to lead to higher interest rates across tenors.

Interest rates have plummeted following the RBI rate cut to address economic uncertainty due to the Covid 19 pandemic, and market participants see the RBI move as the first step towards recovery.

“This move was a month or two earlier, but I wish it was slower than ever. It can be seen as the first step towards normalizing interest rates, but we promise that the RBI will support growth. It’s a long way off now. The move will also go along with the expected reversal of reserve requirement (CRR) cuts at the end of March. ” Ministry of Finance so DBS Bank India..

In response to the economic uncertainty caused by the Covid 19 pandemic, RBI has reduced CRR. The amount of interest-free deposits that banks park at central banks has been valid for one year from the beginning of the two weeks and has decreased by 100 basis points from 4% to 3%. March 28, 2020. The RBI plans to secure liquidity of over Rs 10,000, as it is likely to reverse in March. One basis point is 0.01 percentage point.

Bankers said the RBI move was logical because short-term interest rates were being treated at very low levels for no reason. Over the past two months, overnight market interest rates have fallen to a low of 3.10%, and the RBI’s reverse repo rate of 3.35% has been invalidated, well below the central bank’s benchmark of 4% repo rate. The overnight market, which also includes mutual funds, fell to 2.57% in early December.

“Some companies have raised nearly 3% of their one-year commercial paper. This has been the worst for a long time. This move has led some banks convinced of their liquidity position to retain surplus funds for 14 days. “This is the expected normalization,” said Harihar Krishnam Lucy, Chief Financial Officer of Firstland Bank.

However, further liquidity measures are determined by the foreign exchange flow. Between January and October last year, RBI Net purchased $ 73.40 billion through spot market intervention. This almost doubles from the whole of 2019, showing RBI data. The spot market intervention by buying dollars released rupees into the banking system and is now in the black at around 5.9 rupees.

RBI bought dollars this year to sterilize the influx of foreign portfolios and won $ 29.24 billion in Indian securities this year. As a result, Mint Road’s foreign exchange reserves have risen to a record $ 585 billion, some bankers question.

“I used to say that I had enough reserves to cover 6-8 months of imports, but now that I’m covering 20 months of imports, this ongoing dollar purchase is It’s useless anyway, and I don’t understand because it’s actually just funding. The US deficit. The RBI wants to keep interest rates easy, so it’s time to consider dealing with currencies. ” DBS Bank Said.

The jury is still wondering if the RBI move will make a difference, as the window is open only to banks and not to insurers that have limited means of holding investment trusts or additional cash. Has not decided. Also, the fact that banks still have the option to hold extra money overnight at RBI means that only a few banks want to save money for 14 days.

Savers can now expect a little higher interest in short-term investments. “It should make investment trust schemes shorter than bank deposit savings attractive,” said Soumyajit Niyogi, Associate Director. India evaluation.. “Short-term interest rates are likely to rise overnight, but long-term interest rates will remain almost unchanged. This move marks a super-easy monetary cessation.”

It is not yet known how much profit the RBI will make and how much this move will affect market sentiment.

RBI liquidity indicators do not cause widespread declines in interest rates RBI liquidity indicators do not cause widespread declines in interest rates

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