Embrace the "Mujo" philosophy which involves acknowledging the impermanence and transience of all things in life. In trading, the environment is changing constantly and we must endeavor to recognize the changes and quickly adapt to respond better to the changing environment.
In the Oct 6 Policy Statement, Governor mentioned the possibility of OMO Sales and I wrote in an earlier article the expectations for the same. Additionally, OMO Sales were seen as a tool for maintaining the interest rate differential with the U.S.
|
Durable
Liquidity (in Inr Crs) as on Dec 15, 2023 |
215,664 |
|
CiC (in Inr
Crs) as on Dec 15, 2023 |
33,67,675 |
|
Estimate CiC
Increase over the next Quarter (in INR Crs) |
150,000 |
|
Durable
Liquidity est as at end of Mar 31, 2024 (in INR Crs)* |
65,000 |
|
Estimated CiC
Increase in April 2024 (in INR Crs) |
65,000 – 75,000 |
|
Estimated CiC Increase in May 2024 (in INR Crs) |
55,000 – 65,000 |
|
Durable Liquidity as at end of May 2024* |
-55,000 to
-75,000 |
*Estimates assume no FX operations
System Liquidity is estimated to
turn into deficit on turn of the Financial Year and hence OMO Sales appear to
be a distinct possibility. According to the liquidity management framework, the
banking liquidity being kept in deficit or surplus is a design feature of the
liquidity management framework and build up of liquidity into a large deficit
(greater than about 0.25% - 0.50% of NDTL) if expected to persist, should be
offset through appropriate durable liquidity operations.
|
NDTL (in INR
Crs) |
206,00,000 /
206 Lac Crores |
|
RBI Lower
tolerance Band to Liquidity Deficit 0.25% of NDTL |
51,000 Crs |
|
RBI Upper
tolerance Band to Liquidity Deficit 0.50% of NDTL |
103,000 Crs |
While the first 5 months of the year see a rise in CiC, the following 3 months, see a decline. Uptick in CiC is attributed to Rabi Harvest, Marriage Season, Celebration of Hindu Festivals and Elections while CiC decline is seen on Onset of Monsoons.
Purely from the lens of Currency
Demand and Liquidity Framework, no durable liquidity measures are required
until September 2024.
Domestic Economic Activity has
been resilient and today’s Manufacturing PMI release shows the same. The
outlook for the Economy is solid with GDP growth seen over 6% for FY 2025 and the
outlook for Inflation, based on RBI projections, is one of moderation. Q2 FY
2025 inflation is seen at 4.0%.
By middle of next year, Global
Central Banks are expected to cut interest rate amid slowing growth and
domestic real rates reach peak levels on declining inflation prints. RBI at
some point in Q1 FY 2025 may start guiding the operative rate / Call money rate
towards the policy Repo Rate which has been trading at the upper end of the interest
rate corridor. Durable Liquidity infusing measures could come in the form of
OMOs or B/S Swaps.
The next few months are expected
to see positive FPI flows ahead of the Lok Sabha Elections and JPM Bond
Inclusion. Hence, B/S Swaps are a distinct possibility. Central Bank’s (CBs) Fx
operations in Q1 could see intervention via Buy Fx + S/B FX Swaps and towards
the turn of the year, intervention could be squarely through plain FX purchases
to infuse durable liquidity. RBI could also conduct OMO purchases or alter the
system liquidity requirements through a CRR Rate Cut of 0.25% - 0.50% or announce long term Repo operations.
Global Macro will have an
important bearing on the choice of instruments and the timing of announcements.
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