The government securities market on Tuesday felt the repercussions of the Reserve Bank of India’s measures to revive the depreciating rupee.
Government security (G-Sec) prices crashed by up to Rs 4 and yields, on an average, surged by about 50 basis points across the board.
India Ratings & Research assessed that banks’ trading income will be sharply hit by the jump in G-Sec yields.
However, the rupee found some support from the RBI’s measures and closed at 59.32 a dollar against the previous close of 59.86.
Late on Monday, the central bank announced that the banking system can tap its Liquidity Adjustment Facility (LAF) for funds up to 1 per cent of the system’s overall deposits, subject to a cap of Rs 75,000 crore. Currently, there is no such cap.
Banks made the most of the one-day window available to take advantage of the relatively cheaper (at the fixed coupon rate of 7.25 per cent) liquidity before the cap kicks in.
In all, the RBI received and accepted 52 bids from banks under the LAF, aggregating Rs 2,16,350 crore.
Redemption pressure
The other liquidity tightening measures are: Banks will have to pay stiff interest rate of 10.25 per cent against 8.25 per cent earlier if they want to tap the marginal standing facility (MSF) to overcome the liquidity deficit. And, the RBI will conduct Open Market Sales of G-Secs worth Rs 12,000 crore on July 18.
According to N. S. Venkatesh, Chief General Manager (Treasury), IDBI Bank, there was a knee-jerk reaction in the market to the RBI’s liquidity tightening measures.
The central bank’s moves prompted a sell-off in G-Secs, believed to have been triggered by banks pressing mutual funds for redemption of their investments.
Samiran Chakrabarty, Head of Regional Research, Standard Chartered Bank, said the measures indicate that the RBI’s monetary policy stance is no longer accommodative.
Bank rates steadying
State Bank of India, in a statement, said the central bank’s measures are intended to curb speculation in the market and are not seen by it as indicative of any systemic problem or deeper malaise.
“It is, therefore, expected that the position in the market will stabilise shortly. Hence, neither the management nor the board of SBI that met today in Mumbai felt that this requires any adjustment of lending rates,” said India’s largest bank.
Bank of Baroda Chairman & Managing Director S. S. Mundra observed that the RBI's measures will provide stability to the rupee and curb building up of speculative positions.
“These (measures) appear to be purely short-term in nature and are not likely to impact the mid/long-term view on interest rates. Looking to the existing liquidity position, we do not foresee that any action on interest rates, particularly on the deposits side, is needed as of now,” said the BoB chief.