HIGH ON GROWTH, LOW ON CASH

HIGH ON GROWTH, LOW ON CASH

While the central bank maintained its neutral stance and held policy rates, it revamped merchant discount inapush foralesscash economy

Liquidity to remain comfortable: RBI

The Reserve Bank of India (RBI) has permitted overseas branches and subsidiaries of Indian banks to refinance the existing external commercial borrowings (ECBs), giving them a level playing field visàvis their global counterparts.They can refinance ECBs of AAA rated companies as well as Navratna and Maharatna public sector undertakings, by raising fresh ECBs, the RBI said in a statement on developmental and regulatory policie

"The decision in allowing subsidiaries of Indian banks abroad to refinance AAArated corporates will provide a fair and just opportunity to Indian banks to book and retain good quality assets," State Bank of India Chairman Rajnish Kumar said.Currently, Indian corporates are permitted to refinance their existing ECBs atalower all in cost. The overseas branches/subsidiaries of Indian banks are, however, not permitted to extend such refinance

In order to provide a level playing field, it has been decided, in consultation with the government, to permit the overseas branches/subsidiaries of Indian banks to refinance ECBs.The revised guidelines will be issued with in a week, the central bank said.

The Reserve Bank of India (RBI) will be standing firm to ensure liquidity remains comfortable in the system, assured top central bank officials in the post monetary policy conference on Wednesday

Strongly rebutting the market interpretation that RBI´s secondary market bond sales have reduced liquidity in the system, and could be the primary cause for short term spikes in rates, RBI Governor Urjit Patel said liquidity drying up was not the correct definition, as the “weighted average call rate continues to be below the policy repo rate. So, to me it is not at all clear (criticism on liquidity), and we are still undertaking a fair bit of reverse repo operations”.

The RBI injects money through repo operations, and sucks out liquidity through reverse repo. Both legs have overnight and longer maturity period versions.State Bank of India (SBI) recently raised its bulk deposit rates by 100 basis points, as liquidity reduced in the lender.

But, the RBI governor said it was “more of a qualitative assessment, rather than quantitative” as bulk deposit rates remained very low foralong time.RBI Deputy Governor Viral Acharya explained the RBI´s stance at some length.“I think perhaps the market is adjusting to the fact that we have been in remarkably surplus conditions for a while but I think we are nowhere close to having reached neutrality,” he said in the post policy conference.

The regulator´s neutral stance would mean on some day banks would borrow from the RBI, while parking excess money on other days.Acharya said RBI was “essentially absorbing liquidity to the tune of” Rs 20,000-80,000 crore ona “pretty persistent basis”.

The deputy governor also clarified that while buying portfolio flow dollars from the markets, the central bank had injected over Rs1 lakh crore of rupee liquidity on top of the demonetisation induced money.

That required sterilisation through issuance of special securities but the RBI did that with a lag “because we were waiting for the liquidity conditions post demonetisation to normalise, and see whether currency in circulation stabilises”.The RBI has issued Rs 1 lakh crore of special bonds and sold another Rs 90,000 crore of regular bonds directly to the secondary market to neutralise the swollen liquidity condition, which would have fanned inflation if kept for long.

In March, banks were parking close to Rs 6 lakh crore of excess liquidity with the central bank.Acharya said the RBI would continue to manage the evolving liquidity conditions throughamix of variable rate repo and reverse repo of various maturities, to meet short term liquidity fluctuation.

To meet longer tenure liquidity needs, it will also consider open market operations, secondary market bond purchase or sale “in case the liquidity is required to be injected or absorbed on a durable basis”.Liquidity conditions would be marginally surplus till the end of this financial year but should reach neutrality in the first half of 2018, Acharya said.Yields on the 10 year bond closed at 7.031 per cent from its previous close of 7.061 per cent after the liquidity assurance.

The Business Standard, New Delhi, 7th December 2017

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