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Liquidity Stance Moved to Positive by RBI

Money creation to pick up pace

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monetary policy
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.

RBI
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.

RBI
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.

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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)

Next Story

Australian Economy Could be Hit Hard by the Coronavirus

Know how coronavirus can have a negative impact on the Austalian economy and entertainment industry

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Australia economy coronavirus
According to economists, Australia could lose as much as $1 billion due to coronavirus outbreak. Pixabay

The outbreak that originated in Wuhan, China has quickly caused a crisis across the world. The virus has already been announced to pose a worldwide threat, but the biggest risk groups are the countries located close to China.

The toll has not been limited to those infected by the virus. The entire economy of the world is currently going through a major change, since China and its neighboring countries, including Australia, are such important players in the world trade. All the flights going in and out of China have been canceled and traveling, in general, has become much more dangerous, hence much less popular. The scope of the damages caused by the coronavirus has already stunted the economy of the region.

Economic losses for Australia

According to economists, Australia could lose as much as $1 billion due to this outbreak. The tourism sector has taken the biggest hit with these changes. The outbreak happened during the Chinese New Year, which is usually a huge time for international travel, but because of this outbreak, the traveling is limited, causing the countries that usually see a lot of action in ticket sales, a major loss. Even though 99% of coronavirus cases are registered in China, there are some singular cases outside of the country, in Australia as well, so the traveling is actually quite difficult, with some airlines completely shutting down their flights to prevent the virus from spreading.

Australia economy coronavirus
The outbreak has affected the businesses and services that operate in public areas, but most of all it is the entertainment industry in Australia that has suffered. Pixabay

What is also affecting China is that they have suspended all the trading, and for a lot of countries, especially for Australia, for which China is an extremely important trading partner, the access to a lot of imported goods has been limited.

The world has experienced outbreaks of a similar scale two times, during the swine flu (H1N1 Flu) in 2009, and SARS 2003, also originating from China. But this time around, having had experience with SARS, China reacted much more quickly than in the previous case, hopefully ensuring the better prevention of international contamination, but coronavirus is difficult to diagnose because it does not immediately show up, with varying symptoms, so a person could be carrying a virus without even knowing it for two weeks.

The effects on the entertainment industry

The outbreak has affected the businesses and services that operate in public areas, but most of all it is the entertainment industry that has suffered, because amidst the outbreak, not only do people have no time for these kinds of activities, but also most of them require being around a lot of people in smaller spaces.

Australia economy coronavirus
What is also affecting China is that they have suspended all the trading, and for a lot of countries, especially for Australia, for which China is an extremely important trading partner, the access to a lot of imported goods has been limited. Pixabay

Australia has one of the most famous gambling scenes, with two outstanding leaders in this industry located there, The Crown and Star, who rely on rich gamblers coming in from China.  So as on mainland China it is illegal to gamble the VIP gamblers come in Australia to get access to online gambling for real money and play here online pokies games. These establishments are already experiencing huge losses. The USB forecast even went on to say that these casinos will likely see a 50% drop in their income because of the outbreak. These casinos are a tourist destination as well, and considering the dangers that come with flying in the regions around China, these casinos are bound to have a pretty rough quarter.

The airline companies will also experience huge losses these following weeks and since we don’t know whether there will be a solution anytime soon, and how bad the coronavirus can get, these estimations could really grow, causing even bigger disruptions. The exact numbers could change in a matter of weeks, depending on how the virus behaves, but one thing is clear, the outbreak has greatly affected the economies around the world, and especially in the region. Australia is already recovering from the terrible bushfires that have destroyed a lot of Australia’s wildlife and facilities.

Also Read- Simple Blood Test May Help Improve Diagnosis of Ovarian Cancer: Study

Now in addition to that, the country is experiencing the consequences of the virus outbreak and is feeling the results of the outbreak on its economy and financial sector, with tourism and entertainment, two for the huge parts of the Australian economy, taking the biggest hit.