News Digest

28 November 2017
Interest rates are set to rise as liquidity tighte

The net absorption of liquidity by the Reserve Bank of India (RBI) on Friday was about Rs35,000 crore, down 65% from the Rs1 trillion a month back and a far cry from the peak of Rs8 trillion in January. No wonder market chatter that liquidity is finally inching close to being neutral is growing louder. The fact that RBI cancelled its plan to sell government bonds through open market operations (OMOs) last week added further mojo to this talk. Bond traders took this as a sign that the central bank is probably done with its OMO sales, rightly so since surplus cash is now reduced. RBI's absorption through its various daily reverse repo operations has dwindled but banks still hold close to Rs1 trillion worth of treasury bills, issued under the market stabilization scheme (MSS) to mop up the deluge of deposits in the aftermath of demonetization. These bills will mature in the fourth quarter of the fiscal year and will add to the liquidity. Considering that MSS under which these bills were issued has outlived its purpose, the possibility of RBI asking the government to issue a fresh batch to stem this inflow is low. Also, an exchequer already stretching its fiscal limits through bank recapitalization wouldn't take kindly to added interest burden under MSS.

Read More