By Dharamraj Dhutia
MUMBAI (Reuters) – The Reserve Bank of India is expected to slow its liquidity infusion after pumping 8.57 trillion rupees ($100.06 billion) into the banking system since December, with a large surplus transfer to the government expected soon, several investors said.
The central bank concluded its final scheduled open market bond purchase on Monday, and has not yet announced any more purchases. The RBI has been infusing liquidity since the last six months.
“Dividend payment to the government and subsequent government expenditure will release adequate funds into the system and there should be no need to infuse liquidity through OMOs (open market operations),” said Sandeep Bagla, CEO at Trust Mutual Fund.
Estimates for the upcoming surplus transfer range from 2.5 trillion to 3 trillion rupees as per seven economists, though those at Citi expect a larger payout of between 3.5 trillion rupees and 4 trillion rupees.
The RBI has of late slashed its cash reserve ratio, followed by secondary market debt purchases, foreign exchange swaps and aggressive open market operations. It is expected to announce its surplus transfer to the government before the end of this month.
“With the dividend payment, the core liquidity may cross 5 trillion rupees, which is a very high number. For the next three months RBI need not inject durable liquidity, they can look at OMOs may be from September onwards,” said A Prasanna, head of research at ICICI Securities Primary Dealership.
Bond market participants expect a pause in the recent price rally, with yields likely to consolidate after a sharp move.
The 10-year benchmark yield has dropped 38 basis points since the start of the financial year, following a 17 bps decline in the prior four months.
Shorter duration bond yields have seen a more significant drop, with the five-year yield down 57 bps since April 1 after easing by 26 bps in previous four months.
“We do not expect any more announcement for open market purchases in this month, and with expectation of terminal repo rate of 5.50%, the decline in the 10-year benchmark bond yield could bottom out around 6.15%-6.20% levels for now,” said VRC Reddy, treasury head at Karur Vysya Bank.
($1 = 85.6460 Indian rupees) (This story has been refiled to correct to ‘investors’ from ‘economists’ in the headline and paragraph 1)
(Reporting by Dharamraj Dhutia; Editing by Nivedita Bhattacharjee)
