The Hindu Business Line : Market stabilisation scheme may be resumed

Ample liquidity
High liquidity has impacted 91-day T-bill auctions.
Cut-off yield is down 33 bps to 7.02 per cent.
FII inflows during the last 3 days have been $232 m.

C. Shivkumar

Bangalore, Jan. 3 With liquidity overhang returning to haunt the money markets, the Reserve Bank of India is likely to restore the market stabilisation Scheme (MSS).

The overhang was evident from Thursday’s Liquidity Adjustment Facility (LAF) auction. At the LAF auction, there were 38 bids for the Reverse Repurchase Window of the RBI. The amount mopped up was Rs 40,630 crore. Reverse repos implied sale of securities to banks and other eligible entities for removing excess liquidity from the banking system. Besides, the high liquidity also impacted the 91-day T-bill auctions. The cut-off yield dropped to 7.02 per cent, down 33 basis points from last week’s 7.35 per cent.

The MSS was discontinued from December 12, 2007, when liquidity tightened. This was partly on account advance tax payments. Typically, ahead of advance tax payments liquidity tends to tighten. Besides, during the last calendar month of the year foreign institutional investors also book profits and repatriate earnings, contributing to a tightening of liquidity.

FII inflows resume

FII inflows have since resumed. Since the beginning of this month, inflows amounted to $232 million. Bankers said that they were now expecting the RBI to begin its MSS operations soon if this trend continued. The RBI since the middle of last month has stayed away from any interventions in the foreign exchange markets and was partly contributing to the liquidity build up.

However, ICICI Bank’s Chief Economist, Dr Samiran Chakraborty, said, “It is too early to gauge the liquidity overhang. The current liquidity is also on account of redemptions of securities and coupon payments.”

Coupon payments

Coupon and redemption payments together are estimated at a little over Rs 39,000 crore for the remaining part of the financial year. Besides, some of the advance tax payments have also returned into the banking system, adding to the pressure on liquidity. In fact, the actual Government borrowings estimated for the remaining part of this financial year is only Rs 19,000 crore.

But the liquidity situation was expected to be further aggravated in the coming months. This was partly from inflows from East Asian institutional investors. These include funds from Japan and Korea, who have traditionally parked their reserves only in dollar denominated securities. But yields on dollar securities are barely 4.5 per cent for 30-year paper and 3.85 per cent for 10-year paper. Indian markets offer yields that are far higher. In addition, there was the benefit of exchange rate appreciation that multiplied the returns.

It was to sterilise such flows that the RBI would restore the market stabilisation auctions. The RBI already has a limit of Rs 2.5 lakh crore for MSS for the current year, with a threshhold level for revising the limit at Rs 2.35 lakh crore. The outstanding MSS securities till December 21 were Rs 1.63 lakh crore. This left the RBI with considerable flexibility to intervene using the MSS, bankers said.