More Durable Improvement In Systemic Liquidity, Better Alignment Of Shorter End Rates

Prudent cash management exercise by the Govt/RBI

Rajeev Radhakrishnan, CIO - Fixed Income, SBI Mutual Fund

FinTech BizNews Service

Mumbai, May 23, 2024: Buyback of government securities, reduction in T bill issuance and a record dividend transfer by the RBI have been 3 key events over the last few days. The combined impact of these actions should be a more durable improvement in systemic liquidity as well as better alignment of shorter end rates.

Impact of Buyback/ T bill calendar:

A widely anticipated slowdown in government spending and continued buoyancy in taxes has led to a buildup in government cash balances as well as fluctuations in overnight rate settings. The Just in time release of central funds to implementing agencies that has reduced the float in the banking system remains a structural factor that would lead to swings in overnight rates. Buyback of government securities (maturing in this FY) and reduction in Treasury Bill auctions by Rs 600Bn for the period May 24th- June 27th 2024 should be seen as prudent cash management exercise by the Govt/RBI. At the same time, this addresses the frictional liquidity tightness on account of election related slowdown in government spending. To an extent, signalling if any could be with respect to aligning overnight rate settings closer to the repo rate of 6.5%. While buybacks auctions have had less impact with less acceptance, the impact of reduced treasury bill auction should be more direct in terms of impact on liquidity and short end rates over the coming month.

RBI dividend transfer:

RBI dividend transfer to the government at Rs 2.10 trillion must be seen in the context of the budgeted dividend from RBI and other PSU’s amounting to Rs 1.02 trillion, with the central bank estimated to transfer around Rs 850 Bn to RS 1 Trillion. The extra revenue to the government reinforces the overall buoyant revenue picture and the positive demand- supply scenario for sovereign borrowings. This may also lead to anticipation of further reduction in government borrowings. Options include an additional capex / revenue thrust, a faster consolidation or a combination of both. Overall, this additional revenue source should enable continuation of the fiscal consolidation as budgeted.

The more direct market benefit of extra dividend would be improvement in liquidity as government spending pick up pace. To the extent of income from foreign sources, the transfer also represents addition to core liquidity. With the pick in government spending, seasonal reduction in CIC and anticipated inflows on account of index flows over coming months, the outlook on liquidity dynamics improves materially. This should enable a closer alignment of overnight rates to the repo rate as well as a steepening in the curve. Short end rates stand to benefit as this dynamic plays out.

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