The ongoing normalisation of the banking system liquidity should push borrowers to up the ante on liquidity management, according to India Ratings and Research (Ind-Ra).
The credit rating agency opined that corporates and financial institutions should gear up for the normalcy in the liquidity contour, especially entities having weak financial strength.
Although there may not be any liquidity crunch at the system level in the foreseeable future, volatile global conditions could pose the risk of refinancing, especially for weak entities, said Soumyajit Niyogi, Associate Director, Ind-Ra.
VRRR operation encouraging
He noted that overall, the efficacy of long-term Variable Rate Reverse Repo (VRRR) auction seems to be encouraging, as it has mopped-up excess liquidity in the system without permanent sterilisation.
Thus, the liquidity normalisation has alleviated the risk of large open market sales by the Reserve Bank of India that could have led to permanent sterilisation, and reduced the risk of improper market activities owing to sustained low rates.
With the introduction of long-term VRRR, the daily parking of surplus liquidity has changed to a longer period, starting from 7 days to 28 days.
“Now, banks are parking their surplus liquidity on a long-term basis in sync with their views on demand for liquidity. This has resulted in a significant drop in the daily surplus limit, and turned marginally surplus,” Niyogi said.
Ind-Ra believes the new regime would bring back normal friction in the money market segment. Thus, occasionally, bouts of volatility in the short-term rates owing to the changes in system liquidity cannot be ruled out.
The source of volatility could be tax payment (both advance tax or GST), government spending or lumpy inflow or outflow flow in capital account, according to Niyogi.
Forex reserves to fall
Ind-Ra expects sharp deterioration in the current account deficit (CAD) in FY23 to 2.3 per cent of GDP as opposed to the average 1 per cent CAD in the past few years will drain out a large amount of primary liquidity,
Moreover, rising rates globally and volatile equity markets could put a further drag on the overall balance of payment (account. Therefore, on net-net basis the forex reserves is expected to fall in FY23,
Rates to face upward bias
Ind-Ra believes the overall rate sentiment would face an upward bias.
The recent rise in yields has factored in two critical developments: the shift in the overnight rate to repo (4 per cent) from reverse repo (3.35 per cent) and tacit normalisation by the RBI from an ultra-loose policy to a loose policy.
The overall yield structure has also been affected, owing to the announcement of a large supply of government securities in the Budget.