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RBI: Borrowing to keep money
market in repo mode
Bottom line: Borrowing to keep money market in repo
The just-released April – September Central government borrowing calendar
supports our view that the RBI will keep the money market in repo mode for
now to fight inflation. Our liquidity estimates suggest that banks will need
borrow about 1% of book (of about Rs500bn) at the RBI’s repo window at
6.75-7% till June. Against this backdrop, we expect the RBI to postpone OMO
beyond June. Its Mohanty group has just recommended that OMO should be
triggered off when the money market deficit exceeds 1% of bank book. At the
same time, we continue to expect the RBI to OMO Rs1600bn in 2HFY12
when the Center’s net borrowing is likely to overshoot by Rs400bn.
Why it matters: Interest rates cycling up
We continue to expect interest rates to cycle up. The RBI will hike policy rates
25bp on May 3 (and 50bp more till year-end). Given 20% loan demand, this
should push up lending rates by 75bp in the October-March ‘busy’ industrial
season. We, however, expect the 10y to trade in a range around the midcycle
8%. After all, the RBI will be likely to buy gilts via OMO to generate
liquidity as a large current account deficit will constrain fx intervention. Do
read our latest RBI report (with Ashok Bhundia) here.
Details: Money markets in repo mode for now
Rs1350bn of gilts in April-June: The Center will sell (gross) Rs1350bn in
April-June and Rs2500bn in April-September. Find the calendar at:
http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=24121
Money market to persist in deficit mode: Plugging this into our liquidity
estimates in Table 2, we expect the money market to persist in deficit for now.
Seasonal weakness in loan demand, however, should limit the gap to
somewhat below 1% of bank book. Do read our latest liquidity report here.
OMO to begin post-June: We do not expect the RBI to OMO during the
June quarter. After all, its Deepak Mohanty group on monetary policy has just
recommended that the RBI turn to OMO only if the money market exceeds
1% of bank book. Do read our take on the Mohanty report here.
Rs1600bn RBI OMO with net borrowing to overrun by Rs400bn: We
continue to expect the RBI to OMO Rs1600bn (vis a vis about Rs1200bn,
including auction cancellations, in FY11) after June. This is necessary to
generate liquidity as a large current account deficit – of 3.5% of GDP BofA
MLe – will constrain fx intervention (Table 3). This should also help mute the
rate impact of the Center’s net borrowing likely overshooting the budgeted
Rs3580bn by Rs400bn (BofAMLe).
Next up in India: US$8bn December current account deficit
India: Balance of payments (December), Thursday, 31 March 2011.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI: Borrowing to keep money
market in repo mode
Bottom line: Borrowing to keep money market in repo
The just-released April – September Central government borrowing calendar
supports our view that the RBI will keep the money market in repo mode for
now to fight inflation. Our liquidity estimates suggest that banks will need
borrow about 1% of book (of about Rs500bn) at the RBI’s repo window at
6.75-7% till June. Against this backdrop, we expect the RBI to postpone OMO
beyond June. Its Mohanty group has just recommended that OMO should be
triggered off when the money market deficit exceeds 1% of bank book. At the
same time, we continue to expect the RBI to OMO Rs1600bn in 2HFY12
when the Center’s net borrowing is likely to overshoot by Rs400bn.
Why it matters: Interest rates cycling up
We continue to expect interest rates to cycle up. The RBI will hike policy rates
25bp on May 3 (and 50bp more till year-end). Given 20% loan demand, this
should push up lending rates by 75bp in the October-March ‘busy’ industrial
season. We, however, expect the 10y to trade in a range around the midcycle
8%. After all, the RBI will be likely to buy gilts via OMO to generate
liquidity as a large current account deficit will constrain fx intervention. Do
read our latest RBI report (with Ashok Bhundia) here.
Details: Money markets in repo mode for now
Rs1350bn of gilts in April-June: The Center will sell (gross) Rs1350bn in
April-June and Rs2500bn in April-September. Find the calendar at:
http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=24121
Money market to persist in deficit mode: Plugging this into our liquidity
estimates in Table 2, we expect the money market to persist in deficit for now.
Seasonal weakness in loan demand, however, should limit the gap to
somewhat below 1% of bank book. Do read our latest liquidity report here.
OMO to begin post-June: We do not expect the RBI to OMO during the
June quarter. After all, its Deepak Mohanty group on monetary policy has just
recommended that the RBI turn to OMO only if the money market exceeds
1% of bank book. Do read our take on the Mohanty report here.
Rs1600bn RBI OMO with net borrowing to overrun by Rs400bn: We
continue to expect the RBI to OMO Rs1600bn (vis a vis about Rs1200bn,
including auction cancellations, in FY11) after June. This is necessary to
generate liquidity as a large current account deficit – of 3.5% of GDP BofA
MLe – will constrain fx intervention (Table 3). This should also help mute the
rate impact of the Center’s net borrowing likely overshooting the budgeted
Rs3580bn by Rs400bn (BofAMLe).
Next up in India: US$8bn December current account deficit
India: Balance of payments (December), Thursday, 31 March 2011.
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