With the market stabilisation scheme that will suck out Rs 60,000 crore from the system through various government bonds coming up, yields are bound to go up
The roadmap for remonetization is what the markets are anxiously waiting to hear from the Reserve Bank of India (RBI) governor Urjit Patel, who has barely spoken on the subject.
While the markets have factored in a 0.25% cut in repo rate, it’s the roadmap for the currency management that will be of greater interest.
However, a sharper 0.50% cut in repo rate is expected to boost market sentiments.
N S Venkatesh, executive director, Lakshmi Vilas Bank, told DNA Money, “The plan for remonetizing the economy is what the markets are looking forward to. Markets will be keen to understand the RBI’s roadmap for currency management. I would also expect them to announce a roadmap for rollback of 100% hike in the cash reserve ratio (CRR). Fundamentals continue to be strong in the country, so I do not expect a downward revision in growth.”
A senior treasury official with a public sector bank said, “Markets have factored in a 0.25% cut in the repo rate, and anything above that would boost the market. But with the market stabilisation scheme which will suck out Rs 60,000 crore from the system through various government bonds, yields are bound to go up, and even the borrowing cost for companies through the commercial paper is climbing.”
The rupee closed 20 paise higher at Rs 67.90 to the dollar on Tuesday.
Bansi Madhavani, an analyst with India Ratings, said in a report, “The rupee will take cues from the RBI’s monetary policy as it may lead to erosion in risk appetite. Following the outcome of the Italy referendum, consequent financial and political instability is likely to keep investor preference for dollar assets strong. Additionally, there is a near-consensus among market participants of a rate hike in the next week’s US Federal Reserve policy review. The gains in the rupee, therefore, will be limited and reined in by the evolving risk preference.”
Bank of America-Merrill Lynch said in a report that it would like to know how long the remonetization will take.
“We assume some normalisation in January. Assessing that each month of disruption costs 0.3-0.5% of GDP, we have cut our FY17 growth target to 6.9% (from 7% earlier) with December quarter growth slipping to 5.5-6%. We expect the RBI to reduce OMO (open market operations) if the RBI Act allows it to write off Rs 500/1,000 note which do not return by March 31 in the first place.”
Through OMOs, the RBI buys back government bonds from banks to infuse rupee liquidity into the system.
With over Rs 12.5 lakh crore back in the banking system as deposits, there might be little need for OMOs.
The yields on the government securities are expected to undergo a correction with the rise in crude oil prices and global bond yields.
FINE BALANCE
- With the market stabilisation scheme that will suck out Rs 60,000 crore from the system through various government bonds coming up, yields are bound to go up
- Even the borrowing cost for companies through the commercial paper is climbing
- The rupee closed 20 paise higher to at Rs 67.90 to the dollar on Tuesday
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