Making Sense

"Accuracy of Observation is the equivalent of accuracy of Thinking" I wrote about the expectations from the MPC yesterday and as expected RBI hiked repo rate by 25 bps to 6.50%. Consequently, SDF rate now stands at 6.25% and MSF rate at 6.75%. MPC voted 4 - 2 for change in policy rate.  On the change in monetary policy stance, MPC voted 4 - 2 to maintain monetary policy stance " withdrawal of accommodation" Key Highlights from the MPC Rate decision 1. Global growth prospects have improved 2. Domestic growth is likely to be supported by higher Rabi acreage, sustained urban demand, improving rural demand, robust credit expansion, gains in consumer and business optimism and the government’s enhanced thrust on capital expenditure and infrastructure in the Union Budget 2023-24 3. While RBI acknowledged the continuing downward momentum in inflation in FY 24, it estimated inflation to rule above 4% (RBI has an inflation target of 4% +/- 2%) and domestic economic growth to...

 In my earlier  post , I had promised to cover more on forwards. In the earlier post on Jan 23, 2023, I had written  "A quick look at the pattern of outstanding RBI forward book shows that in the last 2 years, RBI is seen paying forwards in the last quarter of the FY. In 2021, RBI's forward book swelled from o/s longs of $ 47.38 bn in Jan 2021 to $ 72.75 bn in March 2021. In 2022, a similar pattern was observed where the book swelled from $ 50bn in Jan to $ 66 bn in March 2022." That prompted the question around the cause of such paying activity. A market veteran guided me to look at RBIs behavior from a balance sheet and capital management perspective and it now makes sense. So what happens when RBI intervenes in spot market: When RBI buys foreign exchange, the Net Foreign Assets rise on the RBI's Balance Sheet.  In lieu of FX purchases, RBI releases INR liquidity in the banking system which the banks deposit as reserves. So the size of the RBIs Balance sheet increa...

Current liquidity operations with the RBI As on 26th Dec 2022, the net LAF injection by RBI stood at 15K crore. Understanding the component wise break up is important here:  The maturity profile of the outstanding operations is as : RBI stance on liquidity RBI in the last monetary policy meeting retained the stance towards withdrawal of accommodation. The document stated "RBI remains watchful of evolving liquidity conditions and stands ready to inject liquidity, if required, to meet the productive requirements of the economy. This, however, would be contingent upon a durable turn in the liquidity cycle when banks would move away from holding large balances under the SDF and variable rate reverse repos". Anticipating the future liquidity trajectory Variable rate reverse repo stand at 13453 crs maturing on Dec 30, 2022.  Now the liquidity management framework (26 Sep 2019) recommended that the design of the corridor system generally requires system liquidity to be in a small de...