Mumbai: Analysts and bankers said the Indian central bank’s decision to withdraw its highest denomination currency note from circulation is likely to improve the liquidity of the banking system, bringing down the recently hiked short-term rates.
The Reserve Bank of India on Friday said it will start withdrawing Rs 2,000 notes from circulation, though they will remain legal tender. Customers holding these notes can deposit them or exchange them for smaller notes till September 30, 2023.
The value of such notes in circulation is 3.6 trillion rupees ($44.02 billion).
Kotak Institutional Equities estimates that liquidity could be improved at around Rs 1 trillion, while Quantico Research pegs the potential liquidity impact at Rs 400 billion to Rs 1.1 trillion.
ICICI Securities Primary Dealership estimates that the liquidity surplus could increase to Rs 1.5-2 lakh crore.
The liquidity surplus of India’s banking system has averaged around Rs 600 billion so far in May.
Pranjul Bhandari, chief economist for India at HSBC, said that around Rs 2.5-3 trillion of banking sector liquidity flows out in the form of currency in circulation every year.
“Thus, the markets can expect some comfort on the liquidity front.”
Most economists expect the demonetisation to be less disruptive to the economy than the 2016 demonetisation.
effect on rates
Raju Sharma, chief investment officer (debt), IDBI Mutual Fund, said if liquidity surpluses improve sharply due to this move, “the weighted average call rate may continue to remain below the repo rate for the next few weeks. “
The overnight inter-bank rate slipped below the policy repo rate of 6.5% in the last few sessions.
Short-term interest rates for government securities, bank bulk deposits and corporate borrowings are also likely to come down.
Ujjivan Small Finance Bank Treasury Head Rajeev Pawar said that there will be good demand in the treasury bill auctions in the coming weeks.
This will eventually spread to three-year and five-year bonds, he added. The yield on these notes eased 7-8 basis points (bps) on Monday, while the benchmark 7.26% 2033 bond yield fell 4 bps.
Bond yield curve may flatten
Traders said the short-end of the yield curve could see rates fall as liquidity conditions improve, but long-end yields in the medium term will remain higher on anticipated open market bond purchases as well as delayed domestic policy. may increase. ,
Hence, the yield curve is likely to flatten out in the coming months.
Madhavi Arora, principal economist at MK Global Financial, said the demand for short-end bills and bonds will be high for banks to meet statutory liquidity ratio requirements amid increased deposits, as funds can easily come into circulation.
“The longer-term increase is likely as markets readjust their open market buying expectations for the second half of FY2024,” he added.
As liquidity improves, the monetary policy committee is likely to maintain status quo on rates and stance at least till August, said Siddharth Kothari, an economist at Sunidhi Securities & Finance.
($1 = 81.7800 Indian Rupees)
(Reporting by Siddhi Nayak; Additional reporting by Dharamraj Dhutia; Editing by Sonia Cheema)