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RBI to step up liquidity measures

The RBI is likely to raise its liquidity game to calm market anxiety.

Last Updated: Apr 15, 2020, 01.29 PM IST
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Last week, states such as Rajasthan and Kerala paid 150-200 basis points more than the normal spreads on sovereign bonds.
The Reserve Bank of India is likely to raise its liquidity game to calm market anxiety and facilitate smooth government borrowing as bond yields surge despite a 75 bps cut in interest rate.

The central bank may have to raise the amount it lends through the Targeted Long Term Repo Operations (TLTRO), and step up bond purchases, including purchases of corporate bonds for the first time ever. RBI may also raise the ceiling on central and state governments’ borrowing through the Ways and Means Advances, a short term borrowing programme.

RBI, which has been reluctant in following the sweeping actions of Federal Reserve, could use Sec 17 of the RBI Act to extend bond purchases to include corporate bonds with sufficient haircuts, said bankers.

With inflows drying up for the investing community --- mutual funds, foreign institutional investors, insurers – and risk aversi reigning high the government may find it difficult to stick to its borrowing plan. Even if it does so, costs may surge. Government borrowing costs today are where they were last November.

“No one knows the extent of fiscal implications of this extended lockdown ,’’ said Manish Wadhawan, CEO, Serinity Macro Partners and a former HSBC banker. “RBI might have to increase the WMA limits of centre and state to balance the shortfall of revenues centre and states may be facing.’’

The RBI has fixed WMA limit of the central government at Rs. 1.2 lakh crore in the fiscal first half of this year while the amount for states is Rs. 41,890 crores. States can borrow at the repo rate of interest for up to 90 days. In case of delay a 2 percent penal rate is charted.

“The growth impact from Covid-19 due to required measures such as the lockdown, will require active support from the RBI to ensure that Government borrowing for the current financial year is conducted smoothly,'' said Srinivas Varadarajan, managing director at Deutsche Bank.

Yield on benchmark government bonds is back at 6.5 percent, the level that was seen on February 6 this year after plunging to a low of 5.98 percent after the RBI cut repo rate, the rate at which it lends to banks, by 75 basis points to 4.4 percent. A basis point is 0.01 percentage point. Last week states such as Rajasthan and Kerala paid about 150 and 200 basis points than normal spreads over the sovereign bonds.

Collapsing tax revenues and a surge in expenses to meet the Covid-19 related work could push the combined deficit of the central and state governments to as high as 9.8 percent of the Gross Domestic Product, from the budgeted 6.4 percent.

“The RBI is likely to finance fiscal deficit slippage by conducting more open market operations – the purchase of Indian government bonds in the secondary market,’’ said Anubhuti Sahay, economist at Standard Chartered.

The fear of higher fiscal deficit and the lack of guidance from the government how it would repay and what the expenditure road map would be has led a spike in borrowing costs. The next bond auction scheduled for Friday could indicate the market fears.

‘’The RBI should consider another package of wide ranging measures,” said, A. Prasanna, head of fixed income research, ICICI Securities Primary Dealership Ltd. ”It could range from regulatory clarification of eligibility of NBFCs for availing moratorium, opening a repo window for wider set of counterparties with broader range of collateral including corporate bonds. RBI may have to buy as much as Rs 10 lakh crores of government bonds.”

Borrowings of both state and central governments are likely to be as high as Rs. 19 lakh crores compared with the budgeted estimates of Rs. 13.8 lakh crores. However, the demand from banks, insurers and mutual funds could be just half that which may lead to more liquidity measures from the RBI, said an economist who did not want to be identified.

The RBI has already opened the liquidity spigot pumping in more than Rs. 3.7 lakh crores in the last policy meeting. It offered Rs. 1 lakh crores in the TLTRO that should be used to buy corporate bonds.

While it is easing pressure on the corporates, a few top companies such as Housing Development Finance Corp., Indian Oil and Power Grid appear to be benefitting. The RBI may have to raise the amount for it to be beneficial for the broader market.

“I think if the RBI undertakes TLTRO of say Rs 5 lakh crores crores… it should ensure almost all entities rated AA and above have liquidity buffers to tide over this period of zero sales and cash flows,’’ said a managing director of a bank who did not want to be identified.
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