Posts tagged liquidity
First quarterly review of monetary policy 2010-11
Highlights of the policy
RBI Governor, Dr D V Subbarao announced the first quarterly review of monetary policy today. The measures taken were quite on the expected lines (Read our article on monetary policy expectations).
- Benchmark Repo rates hiked by 25 bps to 5.75% with immediate effect.
- Benchmark Reverse Repo rates hiked by 50 bps to 4.50% with immediate effect.
- The interest rate corridor between the Repo and Reverse Repo window reduced to 125 bps from 150 bps.
- CRR, SLR and Bank rate kept unchanged at 6%, 25% and 6%, respectively.
- Baseline inflation projection for March 2010 increased to 6% from 5.5%.
- Baseline estimate for GDP growth for 2010-11 revised to 8.5% from 8%.
- Bank deposit growth target of 18% maintained for FY2010-11; Bank deposit growth stood at 15.0% year-on-year as on July 2, 2010.
- Bank credit growth target of 20% maintained for FY2010-11; Bank credit growth stood at 22.3% year-on-year as on July 2, 2010.
- RBI to undertake mid-quarter policy reviews starting September 2010.
Impact of monetary policy
- As expected, RBI has raised the policy rates. This is the fourth rate hike since March this year raising the Repo by a total of 100 bps and Reverse Repo by 125 bps. Moving differently from earlier moves, the quantum of change in the policy rates; repo and reverse repo is different (What are policy rates?). The Liquidity Adjustment Facility (LAF) corridor has been shrunk to 125 bps, a change first time since November’2008.
What this means?
Short term interest rates, particularly, interbank repo market rates hover in between the LAF corridor in order to prevent arbitrage opportunities for the banks. Because of tight liquidity conditions, short term rates have been quite volatile. This measure is aimed at containing this volatility in the rates.
- Since end-May, banks have been borrwoing from RBI through its LAF Repo window. Out of four rate hikes since March, two were effected when there was ample liquidity in th system. But the last two have come at a time when the liquidity conditions have tightened. Thus interest cost of banks will go up. Assuming that banks will borrow about Rs 50,000 cr for the year as whole from Repo, the combined efect of the last two hikes will shave off about Rs 250 cr from banking sector’s profits.
- What would also hurt banks’s profitability is that deposit rates have also risen. Thus lending rates, in general will go up in order to protect net interest margin (NIM).
- Inflationary expectations have driven RBI to raise the rates. Policy stance of RBI has shifted to “to containing inflation and anchoring inflationary expectations”. RBI has noted that inflationary expectations have firmed up. Accordingly, RBI has also raised the projection for end-March 2011 to 6%. RBI has commented that it will continue to take actions to counter inflationary expectation.
- Though RBI has not hinted at further rate hikes, but its strong concern for inflation implies that good growth prospect along with continued high inflation will in make it imperative fro RBI to increase rates.
Author:Praveen Bajaj
Bond market/ G-Sec update
Yields on Government securities rose to the highest level in two weeks following the mid-term 25 bps rate hike by RBI on last Friday. Benchmark 10 year bond, 7.80% 2020 security rose 8 bps to 7.64% from 7.56% close of last week.
As expected, yields opened stronger on Monday, but later were dragged down due to buying in the securities. Due to reduced fiscal deficit, RBI had announced a reduced borrowing last week. Same was expected for the week as well. But RBI announced the issue of securities worth Rs 12,000 cr. Along with this, rally in US treasuries kept the sentiments up in bond market. Yields weakened till 7.57% on Wednesday.
Liquidity conditions eased slightly compared to the last week. Amount borrowed from RBI’s repo window averaged above Rs 50,000 cr for the week. Indian Financial Services Secretary R Gopalan commented that liquidity crunch in the Indian banking system was expected to ease in the next 10-15 days.
Benchmark 10 year bond daily movement
However, with the release of stronger weekly inflation figures, yields again started hardening. the primary articles index moved up by 1.4% marking a YoY inflation growth of 16.08% as compared to 14.75% observed a week earlier. The Fuel and power index rose steeply by 4.5% taking the inflation rate to 18.02% compared to 12.9% a week earlier. The index factored in higher prices of petrol, diesel, kerosene and LPG as announced by the Government on June 25th.
Markets clearly are factoring in another rate hike at the July 27 announcement of First quarter review of monetary policy. All fixed income market rates have hardened. While commercial paper rates were seen hardening since June beginning, G-sec rates have started hardening recently. Next week we have Index of Industrial Production (IIP) and WPI monthly release both of which would be important guiding factor for RBI to decide on interest rates.
To read earlier updates click here
Author:Praveen Bajaj
RBI raises rates again
As predicted by our analyst Rahul Sonthalia (click here to read) and myself (click here to read) in our earlier articles, RBI has raised the policy rates almost a month before the scheduled 1st quarterly review of monetary policy due at the end of July.
In an after market hour announcement today, RBI raised the repo and reverse repo rate by 25 bps each to 5.50% and 4% respectively (click here to read about repo and reverse repo rates).
Inflation
Anticipation of a rate hike got all the more eminent after the decision to raise the fuel prices and freeing up the price of petrol last week. The move was expected to raise the WPI inflation by about 90 bps. For the month of May, WPI was at 10.16%, above the 10% mark. Though food inflation has been easing, other major indices, fuel index and manufactured products inflation has been rising. RBI in the release noted “There has been some moderation in food price inflation, but the price index of food articles continues to increase. More importantly, the prices of non-food manufactured goods and fuel items have accelerated in recent months”.
Money markets
As compared to earlier rate hikes, this rate hike assumes all the more importance as money markets are facing liquidity crunch. Volumes at repo window have been high during the week, averaging about Rs 60,000 cr for the week. Call rates are also high. This would increase the cost of borrowing of the banks. As for liquidity, RBI has extended the time limit for additional liquidity support and second LAF window till July 16 to ease the liquidity conditions.
Rates of banks
However, it is expected that it would still not lead to an immediate rate hike by the banks as base rate mechanism of pricing loans is being implemented from July 1. Impact of the same on corporate borrowing will be determined only after some time. Thus as of now, corporate borrowing may not get affected.
Market reaction
Since this announcement was done after the close of all the markets, there has been no reaction of the markets. However equity markets have been in negative for most part of the week and still indices are expected to open weak on Monday. Yields on bonds increased after the fuel price announcement last week but the same retraced back most of the gains during the current week. But for the next week again, yields are expected to open strong on Monday.
Author:Praveen Bajaj
Govt Securities update:June 26, 2010
For the first 4 days of the week, government securities moved in a range. Benchmark 10 year bond, 7.80% 2020 bond moved in between 7.55% and 7.61%.
Results of buyback of securities, in which RBI accepted amount of Rs 806 cr against a notified amount of Rs 10,000 cr. This led to a slight increase in the yields on Monday.
Outflow of funds for payment of Broadband Wireless Access (BWA) auctions kept liquidity conditions tight. Amount accessed through the Repo window touched a high of Rs 82,915 cr on Thursday and averaged around Rs 70,000 cr per day of the week. Comments from officials that liquidity easing measures to be taken took some pressure off the bond market.
Primary articles’ inflation for the week was at elevated levels at 17.6% compared to 16.86% last week. This again put pressure on the bonds and yields rose in the first half of trade on Thursday.
Rally in US treasuries after the announcement from Federal Reserve that low rates will be retained for an extended period of time kept the sentiments on a bullish side. These mixed sentiments kept the yields in a range.
However on Friday, after the announcement of market linked oil prices, yields jumped to the weekly high of 7.68% (click here for MB update). The benchmark bond closed the week at 7.65%, 9 bps higher than last week’s close of 7.56%.
For the next week, we expect the yields to trade on a bullish side due to inflationary concerns. Liquidity situation might ease but concerns of rate hike due to high inflation will overshadow the ease in liquidity.
Author:Praveen Bajaj
Weekly G-Sec update:June19, 2010
High inflation released on Monday set the tone for the week. As expected, with the release of inflation above 10% mark, yields on benchmark 7.80% 2020 bond rose 8 bps to close at 7.69% on Monday under fears that RBI might be forced to raise rates to tame inflation. Rates also rose after comments from Finance Secretary Mr Ashok Chawala that bond issuance schedule will not be postponed which led to buying in bonds.
However, after Monday, we saw buying returning to the bonds as comments from RBI officials said that liquidity easing measures will be taken. RBI bought back bonds worth Rs 8,307 cr against a target of Rs 100 cr announced further buyback of bonds worth Rs 10,000 cr on June 21.
Liquidity condition did ease in the current week. Till last week, liquidity was tight due to 3G spectrum payment and advance tax payment by banks and companies. For the week, average of the combined volumes on 1st and 2nd window of repo stood at Rs 34,855 cr compared to Rs 60,311 cr for the last week.
Going forward, we expect the liquidity conditions to ease but the same will not go back to the levels of Rs 35,000-40,000 cr of surplus due to good credit demand part of which is evidenced by the good credit growth for the fortnight ending June 4, 2010.
All these put yields in a comfortable position and yields closed at 7.56% for the week compared to 7.61% last week, and 13 bps down from highest point of the week.
High inflation has sparked debate of a rate rise by RBI again and market will be very sensitive to comments from RBI and Finance ministry officials. We expect yields to trade with a positive bias for the week.
Author:Praveen Bajaj
Weekly G-Sec update:June 12, 2010
After trading in a range last week, yields on benchmark 10 year bond, 7.80% 2020 bond steadily rose 9 bps for the week to close at 7.61% for the week. Surge in yields was driven by tight liquidity conditions.
On all days of the week, we saw Repo window being active. Daily average of the combined amounts on 1st and 2nd window of Repo stood at Rs 60,311 cr for the week compared to Rs11,800 cr for last week. Tight liquidity conditions are driven by the advance tax payment by corporate.
Concerns of higher inflation have also kept the yields on a higher side. Some media reports cited a Govt official expecting inflation to cross 10% mark for the month of May. Good IIP numbers also added to the pressure.
Govt borrowing is progressing in a phased manner. After Friday’s auction, borrowing worth Rs 125,000 cr has been completed amounting to 27% of the total borrowing. Borrowings amid tight liquidity conditions have kept the yields at elevated levels.
For next week inflation (WPI) will be the most watched factor and a high inflation will lead to a surge in yields.
Author name:Praveen Bajaj
Trading Nifty as global liquidity dries up…
This Could Evaporate Liquidity From Markets...
Yesterday the European Central Bank (ECB) announced the key rates and as the streets expected, they were unchanged.
There was no positive out of the press conference from Trichet, the only thing he did was subtly pleading to the world that “EURO is a stable currency’ and reiterated again the same things that the ECB would leave no stone unturned to save the real economy. This lead to over 200 points rally in Dow Jones and more than an 1.5% gain in Euro. I believe that it is more of a short covering bounce back and the only direction the Euro is headed is southwards.
I expected July to be a calm month for the markets, and the biggest reason is that the China AG Bank is coming up with the world’s biggest IPO of all time. On July 16th it is coming up with an IPO of $30 billion and this could really suck huge liquidity from the markets even if it is just fully subscribed. One should wonder what if, the issue gets oversubscribed by two times and three times. It could evaporate the liquidity of the size of two times Reliance Industries total market capitalization which is around Rs 3 lakh crores.
In history too IPOs of high magnitude from good companies have lead to a dearth of liquidity in the Secondary Markets and this time also I expect the same Ag Bank, whose 350 million customer base is bigger than the population of the United States, had $US7.1 trillion in assets as of 2008, its last public financial filing, is a bank which even the institution would love to own and hence the liquidity could dry up.
Hence a good trading strategy for Traders could be to establish position in put options in Nifty expiring in the month of July, as the VIX has also come down significantly. For Investors the best is to stay out of any extravagant short term positions and continue their SIP.
Happy Investing…!!
Author:Rahul Sonthalia, Research Head, Kredent
Weekly G Sec update May 29, 2010
Benchmark 7.8% 2020 bond lost considerable ground in the week due to tightening liquidity conditions arising from the 3G spectrum payment and direction of US treasuries. Yield for the said bond closed at 7.52% on Friday, up 14 bps from close of 7.38% last week.
Bonds were bearish throughout the week tracking weak US Treasuries as rise in stock markets led to a fall in demand for safe heaven assets. In India, tightening liquidity exerted pressure on bonds along with the bond auction of Rs 12,000 cr lined up for the week.
Amount of funds parked at RBI’s reverse repo window reduced this week to an average of Rs 6,332 cr this week against Rs 42,779 cr last week.
Yields rose to the extent of 7.64% on Friday, but announcements of RBI regarding additional liquidity to be provided through Second LAF facility to the extent of 0.5% of their NDTL and waiver of penalty interest on any shortfall in maintenance of SLR arising out of availment of such facility along with RBI Governor’s comments depicting not so confident recovery induced some buying back in the bonds and led to correction in yields.
Spain rating downgrade again ignited concerns of debt crisis and increased demand for safe heavens. Liquidity conditions are expected to tighten further next week and banks are expected to avail funds from RBI through Repo facility.
Author name:Praveen Bajaj
Weekly G-Sec update May 22, 2010
Developments on foreign front push yields down
Yields on benchmark 10 year bond 7.80% 2020 bond closed the week at 7.37, 12 bps down from last week’s close of 7.49. In the initial part of the week, yields rose 4 bps as RBI sold Rs 6,000 cr of cash management bills on Tuesday and announcement of issue of Rs 13,000 cr worth of bonds for the week. Comments of RBI Governor regarding rising inflation also kept the pressure on bonds but on Thursday as results of ongoing 3G spectrum came in yields started falling and closed at 7.38%.
Auction is now expected to fetch Rs 67,700 cr, about Rs 35,000 cr more than originally expected. This was taken as an indication that borrowing might be lesser than targeted and led to buying in bonds. Strength in US Treasuries and falling oil prices also kept the mood upbeat.
Liquidity conditions eased as compared to the previous week. Average daily funds parked at the reverse repo window stood at Rs 42,000 cr.
For the next week, we expect the liquidity conditions to remain comfortable and yields to trade within a range taking directions from US Treasuries.
Author name:Praveen Bajaj
