IN10s steady at 7.30% as the Specter of OMO looms large

Consistency trumps drama - Howard Marks

Today, USDINR traded within the familiar 83.00 - 83.30 range with Nifty trading in green with gains of close to 1% following the move higher in US equities post the welcome NFP print.

Yield on IN10s trade ~ 2 bps lower at 7.30% as the specter of OMO looms large (swing high 7.39%). Domestic Liquidity turned surplus on Nov 3 as Government Spending kicked in with system surplus seen at 13,500 crs. As the system turns surplus, the OMO estimates become crucial.

Facts - FY24 OMO sales are at INR 18K Crore. Government's Budgeted G-Sec gross borrowing is INR 15.43 trn and Net borrowing is budgeted at INR 11.81 trn.

We can anticipate OMOs basis the turn in liquidity into surplus. (Refer to earlier article on the same)

Durable liquidity arises from permanent or long term changes in liabilities of RBI , viz., expansion / contraction of CiC and increase/decrease of banking system reserves due to unsterilized FX interventions.

As on Oct 20, 2023, the durable liquidity is INR 305K. Now, according to last 2 years average of average CIC during a month, until March 2024, CIC leakage is estimated at INR 185K and basis a 5Y average, CIC leakage is estimated at INR 225K. For rough estimates, we assume a CIC leakage of INR 200K. This leaves us with a liquidity surplus of INR 105K.

Then the next attendant question is the estimated FX Intervention. If RBI sells USD, then the system liquidity corrects towards neutrality. $ 10 bn sell side intervention essentially wipes out the surplus liquidity. However, if RBI buys USD, RBI would be supplementing system liquidity which will defeat the very purpose of OMOs. Hence, any buy side intervention is likely to be sterilized through paying in forwards. "One instrument, one objective" as Gov expounded.

The path forward will be a function of the direction of US monetary policy, Geopolitical risks and India's inflation trajectory.

Hence, is it reasonable to assume that the OMO Sales until march could be around the ball park INR 100K ? Now, I have looked at OMOs purely from the lens of durable liquidity and estimated amount until March. The timing of the OMO announcement will depend on sustained surplus liquidity in the banking system.

I make a reference here to the Informist article which draws reference to the Nomura Research "In a note last month, Nomura estimated that liquidity will not be in surplus of more than 158 bln rupees at the start of any week in the current quarter ending December."

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One interesting finding in all this was the massive INR appreciation in the month of Feb and Mar in 2014 and 2019 election years on strong FPI flows. When I write the article on trade data and estimated Balance of Payments, I will cover the same in greater detail.

USDINR % Change FPI Flows (Feb + Mar)

2014 Jan 62.68

Feb 61.79 -1.42% $ 7.20 bn

Mar 60.01 -2.89%

2019 Jan 70.95

Feb 70.83 -0.17% $ 8.60 bn

Mar 69.18 -2.33%

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Comments

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