However, in the recent months, RBI has resorted to Open market operations (OMO) to mitigate high liquidity pressures on the system from time to time. It is estimated that RBI may have infused liquidity of around Rs 70,000 crores by OMO measures in the current financial year, to address the strain.
Thus, the Rs 32,000 crore liquidity infusion into the banking system by RBI is indicative that the central banker may not only want to ease the liquidity situation; but also highlight the change in the monetary policy stance; as also reduce the weight of OMO on fiscal balance sheet.
The banks currently hold around 29% of their NDTL in gilt/t-bills. This is around 500 bps above the RBI mandated SLR floor, providing large head room to central bank for liquidity infusion in the time ahead.
We believe that RBI may continue to maintain the present stance; and would wait out the Union budget announcements to co-ordinate further rate actions. Nevertheless, possibility of further CRR cut, to induce liquidity softening, is more likely vis-�-vis the OMO actions.
Nonetheless, at the macro level, the partial moderation in the domestic consumption and a more notable squeeze in the gross capital formation; is indicative that growth concerns have begun to take primacy in policy calculus. The RBI suggestion of inducing savings and investment cycle may be an intimation in this regard.
In anticipation, the gilt yields across the curve have moderated by around 10-50 bps in the last one month; and by about 60 bps since September 11. We believe that the 10 year gilt may trade in 8.10%-8.40% range in the next few weeks before further guidance from future policy actions.
However, the yields in the money market may continue to remain relatively hard on account of intermittent liquidity outflows, especially due to advance tax flows. Nonetheless, the RBI stance signals that further liquidity easing may be underway which may soften the yields in these segments as well.
The peaking of policy rates, easing of CRR induced liquidity at current levels, and policy concerns for economic growth trajectory; all highlight the possibility of ensuing bull phase in the year ahead.
Resultantly, investors with around 1-year horizon may wish to obtain exposure in long duration bond and/or gilt funds to avail any capital gain opportunities, arising thereof.
Powered by Capital Market - Live News
