Financial Markets and Liquidity Conditions

(https://www.rbi.org.in/Scripts/HalfYearlyPublications.aspx?head=Monetary%20Policy%20Report)

Long term perspective

Development in last 6-12 months

Max 12 slides and a cover page

Annexure if needed

Font size 18

Sources for tables and charts

Recommendation for mpc committee

 India, Italy have the worst bad loan ratios among the top 10 economies
 Five times interest rate cut by 135 basis points
 On Saturday, Das described the lack of strict corporate governance in state-run banks as the
“elephant in the room,” and blamed it for elevated levels of non-performing assets, capital
shortfalls, frauds and inadequate risk management. – Central banks have less control over
state run banks than the private owned banks, but 60% of the business is controlled by
state run banks.
 Large scale collapse of the shadow banking sector, led to a soaking of liquidity from the
market. Small businesses rely on this segment for finances.
 The banking system was wash with funds after demonetisation when humble savers were
forced to dig out money kept under the mattresses and deposit them in banks. Former
Governor Urjit Patel did his bit to suck out liquidity and restore normalcy, but then lost his
chair for sticking to his ground on “slightly deficit” liquidity even after the non-bank credit
crisis of 2018, antagonising the government.
 Shaktikanta Das set up an setting up an internal working group that will review the existing
liquidity management framework.
 Liquidity in the system turned into an average daily surplus in June after remaining in deficit
during April and most of May due to restrained government spending. RBI said that
transmission of the cumulative reduction of 50 bps in the policy repo rate in February and
April 2019 was 21 bps to the weighted average lending rate (WALR) on fresh rupee loans.
Interest rates on longer tenor money market instruments remained broadly aligned with the
overnight weighted average call rate, reflecting near full transmission of the reduction in
policy rate.
 Corporate bond yields in the secondary market in April and May were lower than the lending
rate of banks, indicative of the faster transmission of the RBI rate cuts in the bond markets.
Corporate bond yields (weighted average in the secondary markets) were 9 bps lower than
the banks’ marginal cost-based lending rate (MCLR) in April and 44 bps lower in May, said
CARE Ratings. The 10-year government securities benchmark yield has also declined by
about 56 basis points from its average in April 2019 to about 6.86 per cent.
 The situation at the current juncture has become further complicated due to the crisis in
both the banking and the non-bank sectors. While banks are saddled with about 11 per cent
of their loans turning bad, NBFCs are struggling with solvency issues leading to credit freeze.
 (https://www.bloomberg.com/news/articles/2019-11-17/india-s-central-banker-faces-an-
increasingly-tough-balancing-act)

https://economictimes.indiatimes.com/markets/stocks/news/surplus-or-deficit-why-indias-liquidity-
framework-needs-a-revamp/articleshow/69952238.cms?from=mdr

RECOMMENDATIONS

 MPC should look at the entire term structure of money market rates to gauge the efficacy of
its liquidity stance
 RBI may ease the daily CRR maintenance framework from the current 99 per cent
compliance to 80 per cent or so. This will be indirectly relaxing CRR without officially cutting
it. This will improve the banking liquidity condition.

New additions

After the NBFC crisis the monetary policy committee undertook various steps to improve the
liquididty condition in the market through financial assets

 Open market operations were conducted

 RBI permitted special dispensation to banks up until 31st March 2019, whereby their
incremental credit to NBFCs and Housing Finance Companies (HFCs) after October 19, 2018,
could be treated as high quality liquid assets for calculation of Liquidity Coverage Ratios.
 RBI reduced the minimum average maturity requirement for External Commercial
Borrowings in the infrastructure space raised by eligible borrowers from five years to three
years.

As per RBI, liquidity in the financial system turned into surplus in early June 2019, after a large
injection of durable liquidity by RBI in the previous months.

Bond yields harden

Bond yields hardened a bit in September 2019, after falling relentlessly for over a year.
Weighted average yield on G-sec with 10-year residual maturity inched up to 6.67 per cent in
September from 6.47 per cent in August. Announcement of a steep cut in corporate tax rate
stoked fears of fiscal slippage and a subsequent increase in government borrowings. A rush
towards equities which was not a preferred choice for investors till the corporate tax cut led to
a fall in bond prices, thus pushing the yields upwards.

Corporate bonds mimicked the trend in G-sec yields. The yield on AAA rated 10-year
corporate bond rose to 7.81 per cent in September from 6.81 per cent in August.
The rates did drop at the short-end too, albeit by a lower magnitude. Weighted average yield
on T-bills with 90-days maturity declined by 13 basis points to 5.33 per cent in September
and that on 364-day T-bills by 14 basis points to 5.56 per cent.

The inter-bank call money market showed an opposite trend in September. The weighted
average call rate eased to 5.30 per cent from 5.37 per cent in August 2019, reflecting
improved liquidity conditions. Average daily turnover under the repo window in September
2019 stood at Rs.43.7 billion, the second lowest since July 2017. Banks parked around
Rs.241 billion in the reverse repo on daily basis in September 2019. This was the highest
amount parked since October 2018.

The Reserve Bank of India cut repo rate by another 25 basis points to 5.15 per cent in its 4th
bi-monthly Monetary Policy review released today. The yields are likely to soften mirroring
the policy rate cut. Also, the government has decided to stay with the borrowing plan for the
fiscal, as announced in the budget, sending a strong signal that it will try and meet the fiscal
deficit target. This creates a conducive environment for the yields to ease.

https://www.cmie.com/kommon/bin/sr.php?kall=warticle&dt=2019-10-
04%2014:28:41&msec=336