Skip to main content

RBI's Rs 3-trn bond buys this fiscal could distort market: Deutsche Bank

The Reserve Bank of India should instead consider cutting the cash reserve ratio, a move it last resorted to six years ago The Indian central bank’s purchases of bonds to inject cash into the financial system may have an unintended effect of distorting bond prices, according to Deutsche Bank AG. The Reserve Bank of India should instead consider cutting the cash reserve ratio, a move it last resorted to six years ago, as various reserve requirements enforced by the authority so far are curbing deposit growth and transmission of rate cuts, said Srinivas Varadarajan, managing director for fixed income and currencies at the bank’s Indian unit. 
“Open-market operation interventions beyond a point do have an impact on the micro structure of the government bond market,” he said in an interview. “The  RBI should look at CRR in addition to OMOs as active instruments to manage durable liquidity in the system.” The central bank has bought a record Rs 3 trillion ($43.5 billion) of government bonds so far this fiscal year to ease a cash crunch and is set to inject rupee liquidity via a dollar/rupee swap auction worth $5 billion on March 26. The purchase of bonds through OMOs has led to steepening of the yield curve as most of the buying was concentrated at the shorter end. The introduction of he currency swap tool to inject cash has led to some speculation that the RBI may cut down on OMOs.Varadarajan also shared his views on some other topics. Below are excerpts from the interview:
When would foreign flows to Indian debt accelerate?
India must continue to show success in inflation targeting. Also, we need to ensure that whatever the forecast is on inflation, deviation from that is not too large. When people get that comfort, flows will start to come in The reluctance to allow an ascension into global benchmarks due to this issue of fiscal dominance will also get addressed over a period of time. 
Outside INR/USD, which other currency pairs need RBI attention?
What the RBI needs to be mindful of is the cross CNY-INR exchange rate. Almost 60 percent of our electronic imports are from China and as the currency appreciates more imports will start to come from there It needs to intervene keeping in mind where the bilateral exchange rate is because of such issues
What is your outlook for local bonds and the rupee this year?
The market is pricing in a 25-basis point rate cut in April. A 50 percent chance of another 25-basis point cut has been priced in If you have a stable government, given the high real interest rates, there’s a good chance that fund flows can be very robust. The old benchmark should move in the broad range of 7.25-7.75 percent this year as you also have supply coming in If flows increase, the RBI should intervene and build reserves from 69.50/USD onward as you require that from an import-cover perspective. Around 74.50  should broadly be the cap right now
The Business Standard, 25th March 2019


Popular posts from this blog

SC order on RBI circular: More options for banks to tackle defaulting firms

Lenders also have the option of restructuring the loans Lenders to companies which are under stress could now have three options to deal with them if they default on loans: take a haircut as part of a one-time settlement, restructure the loans for a longer tenure as they did when corporate debt restructuring schemes were allowed, or go to the Insolvency and Bankruptcy Code (IBC) for redress. These changes in the options available to lenders come, according to PE funds and bank lawyers who are involved in the IBC process, in the wake of the Supreme Court on Tuesday setting aside the 12 February RBI circular, which allowed a 180-day window to banks to resolve a company default.But they can still find a resolution. According to a Reserve Bank of India circular, a loan becomes a non-performing asset when banks cannot find a way of recovering their money in 90 days. In short, banks still have a window to resolve the default. Lenders can take a haircut as part of a one -time settlement of du…

April GST collections at new high despite rate rationalisation in December

Goods and services tax (GST) collection touched a record high in April, exceeding Rs 1 trillion for the third time in four months. The mop-up was 10 per cent higher over the previous year. Gross collection for the month was Rs 1.13 trillion, said the finance ministry. Despite the recent rate rationalisation in December, a rise in collection was reported. Of the total collected, the CGST (central GST) contributed Rs 21,163 crore, the SGST (state GST) Rs 28,801 crore, the IGST (integrated GST) Rs 54,733 crore (including Rs 23,289 crore on import) and cess Rs 9,168 crore (including Rs 1,053 crore on import). After settlement of the IGST and the balance IGST in a 50:50 ratio between the Centre and states on a provisional basis, the CGST stood at Rs 47,533 crore and SGST at Rs 50,776 crore. The CGST target in the Union Budget for 2019-20 is Rs 6.1 trillion. “The April collection indicates the tax base is increasing gradually, with GST getting stabilised with measures such as e-way bills and…

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…