Longer term repos over OMOs of RBI negative for bond mkt – Kotak
New Delhi, Sep. 27 (IANS): A liquidity deficit stance along with the preference of longer-term variable rate repos over open market operations of RBI will be negative for the bond markets, Kotak Institutional Equities said on Friday.
Reacting over the just released Liquidity management framework of RBI, the report said RBI has opted for near status quo.
“Overall, we believe that a liquidity deficit stance along with the preference of longer-term variable rate repos over OMOs will be negative for the bond markets. However, the framework does allow for flexibility if financial conditions warrant maintaining a liquidity surplus in the near term, keeping hopes of OMO purchases alive,” the Kotak report said.
“The recommendations of the new liquidity framework are broadly in line with the existing framework, with a few tweaks in select areas. Some of the points that are noteworthy are — preference to maintain system liquidity at a deficit of 0.25 per cent-0.5 per cent of NDTL as against a neutral level earlier and unlimited window of liquidity under the single overnight variable rate compared to 0.25% of NDTL at the fixed repo rate and 0.75% of the NDTL at the 14-day variable rate term repo earlier.”
NDTL (Net Demand and Time Liabilities) shows the difference between the sum of demand and time liabilities (deposits) of a bank (with the public or the other bank) and the deposits in the form of assets held by the other bank.
Cash Reserve Ratio is a specific amount of funds which the commercial banks have to keep with the Reserve Bank of India to ensure liquidity in the system.
The framework, if revised, will have an impact on the flow of credit to various sectors in the economy. This includes the transmission of policy rate changes to the money market rates.
The working group has recommended largely maintaining the present corridor system with call money rate as the target rate. However, it has suggested making it more flexible to adapt to the needs of the system, when it is in deficit or surplus mode.
The group has recommended using tools like longer-term repo operations, in addition to open market operations (OMOs) and forex swaps to manage liquidity in the system.
“The daily dissemination through Money Market Operations (MMO) press release should be improved by including the ‘flow’ impact of liquidity operations. To improve transparency, quantitative assessment of durable liquidity conditions of the banking system may also be published,” the report said.
An internal working group (IWG) of the Reserve Bank of India, mandated to review the current liquidity management framework, has recommended the use of long term repo ops at market rates to manage liquidity. Liquidity management is the operating procedure of monetary policy, which seeks to ensure that sufficient credit is provided to all productive sectors of the economy.
The IWG also recommended the use of longer-term variable rate repos of more than 14 days and up to one-year tenor as an alternate to OMOs for liquidity management and re-emphasized that the liquidity operations should be consistent with the policy rate set by the MPC.
The RBI has invited public feedback on the working group’s recommendations by October 31, 2019.