RBI’s switch auction of G-secs stays undersubscribed on tight liquidity

“There is quite clearly strain in the market in terms of liquidity not being evenly distributed. The weighted call money rate was 6.77 per cent on Friday, reflecting the shortfalls in liquidity of some banks,” said Madan Sabnavis, Chief Economist, Bank of Baroda.

The overall liquidity in the system is stable at a lower level of just about Rs 50,000 crore, he said. “Banks were demanding higher yields which led to under-subscription,” Sabnavis said.

Switches and conversions have been used to defer payments due in the next couple of years, with the maturities being stretched. This reduces pressure on the market in terms of fresh borrowings being needed.

Even as benchmark rates are on hold, onshore liquidity is tight. “Banking system liquidity re-narrowed to Rs 80,000 crore this month as against Rs 150,000 crore at the start of the year, pushing up the overnight call money rate to above the benchmark this week, resulting in de facto tightening. Ongoing dollar (intervention) purchases could help ease some of this tightness, until term repo auctions will be tapped to tackle the squeeze,” said Radhika Rao, Senior Economist, DBS Bank Ltd.

Equity markets have attracted strong foreign inflows since March 2023. Another factor that could provide temporary relief is the upcoming RBI’s dividend payout for FY23, as their books benefited from favourable forex moves. Dividends from the RBI and public sector banks were pegged at a revised Rs 40,950 crore in FY23 and budgeted at Rs 48,000 crore this year.

The yield on the 10-year bond had briefly slipped below 7 per cent late last week on a host of positives including lower oil, manageable inflation and firm demand. “With much of the positivity already baked in and busy auction calendar ahead, further downside in yields might run into resistance,” Rao said.

The RBI had surprised with a pause in interest rates in April, while maintaining its stance of ‘withdrawal of accommodation’, preferring to take stock of hikes to date. Domestic considerations besides tentative calm in the global markets, helped by a US rate cycle likely slipping into an extended pause, lower the likelihood that the policy committee will return to hikes. Instead, markets will gauge if a pivot towards easing could be brought forward to late-2023, Rao said.