Never miss a story

Get subscribed to our newsletter


×
A further implication of this is that domestic net government bond supply between October and March is largely agnostic to whether the government decides to do a foreign currency sovereign bond issue or not. Pixabay

The focus of monetary policy is now conclusively on ensuring better transmission. Towards this, for the first time in recent history the RBI has consciously moved liquidity stance to positive. Indeed, the Governor has lately referred to the Rs 1-1.5 lakh crore positive system liquidity as a comfort factor and facilitator for banks.

It thus seems reasonable to infer, in the absence of an official framework on liquidity ‘targets’, that the RBI will want to ensure sustained liquidity surpluses of this magnitude going forward as well.


The micro aspects:
As per our estimates, the so-called ‘core’ system liquidity (total banking liquidity minus government balances) is around Rs 65,000 crore as on early August. Assuming currency in circulation (CIC) seasonality of last year and superimposing a nominal growth rate to this, the system will lose around Rs 2,20,000 crore from here to March 2020.

Adding back a higher RBI dividend and some balance of payment accretions, we are largely left with zero core liquidity by end of the financial year. However given the RBI’s current liquidity preference, we would assume they would want core liquidity to be at least be in surplus by a similar magnitude as today. This means that one should reasonably expect further open market operation (OMO) bond purchases from the RBI of at least Rs 65,000-75,000 crore between now and end of the financial year.


Adding back a higher RBI dividend and some balance of payment accretions, we are largely left with zero core liquidity by end of the financial year. Pixabay

A further implication of this is that domestic net government bond supply between October and March is largely agnostic to whether the government decides to do a foreign currency sovereign bond issue or not. This is assuming that say $10 billion raised by government from offshore sovereign bonds would have been entirely converted by RBI into rupee liquidity. Thus the need for OMOs would have fallen to that extent.

Refreshing a table we had done in an earlier note, the Rs 70,000 crore assumed for the sovereign bond issue may just end up getting replaced as RBI OMO should the bond issue not happen.

While on the subject, one has to comment on the conceptual fallacy in the criticism often levied towards RBI’s OMOs as being monetisation of government deficit. Assuming an unwillingness to cut Cash Reserve Ratio (CRR), the only two other tools for policy driven liquidity creation is purchase of forex or bonds. Long term repos are no solution since this is ‘borrowed’ and not permanent liquidity.

Given that purchase of forex is a function of flows that the RBI doesn’t directly influence, it has to resort to purchase of bonds for discretionary enhancements in core liquidity. Now, if this were being done much beyond the requirements of liquidity creation for the explicit purpose of supporting the bond issuance program or was systematically tied to the quantum of such program or didn’t display two-way directionality, then one could have legitimately argued for backdoor monetisation.

However, there is no evidence of this as well. Thus, any impact from OMOs has to be treated as largely an unavoidable cost of policy implementation just as other tools affect other market variables.


Governor has lately referred to the Rs 1-1.5 lakh crore positive system liquidity as a comfort factor and facilitator for banks. Pixabay

The macro aspects:
As can be seen, after the disruption from the global financial crisis (GFC) had subsided, the ratio of broad money (M3) as proportion of quarterly GDP had largely settled in a range. This broke lower post demonetisation, but hasn’t reverted still to its previous range. This is despite the well acknowledged growth slowdown that has now been underway for some time.

Also Read: Yamuna Flowing Above Danger Mark in Delhi

After largely tracking nominal GDP growth rates between 2012 and 2015, M3 growth had started to fall below GDP growth from early 2016, even before demonetisation. It is only very recently that M3 growth has been catching back with nominal GDP.

It can be argued that a necessary ask from monetary policy in response to the broad-based slowdown is for a higher rate of money supply growth than what has been in the recent few years. Indeed, that seems to have been the case also in the ‘golden’ growth period of 2005 – 2008, where M3 growth was much above nominal GDP growth. Assuming no changes to the money multiplier, this implies a higher pace of expansion in RBI’s balance sheet, including through more aggressive purchases of domestic bonds. (IANS)


Popular

Unsplash

Initially, the firm announced a feature called Audio Recording in Latin America as a way to make people using Uber there feel more safe.

Ride-hailing major Uber has introduced a new in-app safety feature that will allow drivers as well as riders to record audio during trips.

Initially, the firm announced a feature called Audio Recording in Latin America as a way to make people using Uber there feel more safe. The feature is now available in more than a dozen countries throughout Latin America, including Brazil and Mexico.

"To help protect privacy, the audio file is encrypted and stored on the rider and driver's devices and by default no one can listen to the audio, including Uber. If either user submits a safety report to Uber, they can attach the audio file to their report," the company said in a statement.

Follow NewsGram on Instagram to keep yourself updated.

Once riders and drivers enable this feature, they can choose to record audio by tapping the shield icon on the map screen and selecting "Record Audio".

Riders and drivers can choose to record individual trips, and drivers will also have the option to leave the feature on while they are online.

Throughout Latin America this feature has been a popular way to promote safe, comfortable interactions while on a trip. For instance, nearly 70 per cent of riders and drivers surveyed in Rio de Janeiro told the brand this feature helped them feel safer when using Uber.

In addition, the company has expanded the capabilities of our RideCheck technology to detect when a trip takes an unexpected route or when a trip ends unexpectedly before the rider's final destination.

Keep Reading Show less
Unsplash

The Armed Forces Special Powers Act (AFSPA) be repealed in Nagaland

Special Powers For The Armed Forces Act Of 1958 is an act to allow personnel of the armed forces in the states of *[Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, and Tripura] to be granted certain special powers in troubled regions.

In protest, Nagaland has decided to put the Hornbill Festival on hold. Furthermore, the SIT investigating the event has been given a month to finish its inquiry.

Keep Reading Show less
Unsplash

Lee, the de facto leader of the country's biggest conglomerate, Samsung Group, has hinted at making a sizable change to the company to "create a better Samsung."

Samsung Electronics on Tuesday replaced all three CEOs in a surprise move that, the company said, was intended to enhance competitiveness and promote future growth.

Han Jong-hee was promoted to vice chairman and CEO and will be in charge of the newly created SET division, which merged the consumer electronics and IT and mobile communications divisions, previously led by Kim Hyun-suk and Koh Dong-jin, respectively.

Keep reading... Show less