Liquidity in the system has been tight due to the RBI intervention in forex markets and the unprecedented withdrawal of currency with the public
The rupee has made a strong comeback in the past two months after being one of the worst hit currencies in Asia in 2018. After depreciating around 14% (64 to 74.5) from the beginning of the year, its trading below 70 against the US dollar now.
Sensitivity to oil has been always very high to India's external account and 2018 was no exception. With oil being at $85 the current account deficit (CAD) was threatening to exceed 3% of GDP impacting the macroeconomic stability of the country.
Lower oil prices have a lot of inter-linkages for our markets. Since the beginning of the year, the FPI's, after withdrawing more than $12 billion and finally have returned buying around $2 billion in equities and debt. Though the flow of funds to emerging markets would depend on a host of other factors, lower oil prices definitely help as it has a positive impact on various sectors of the economy, boosting growth and helping the macros. One can expect if the Fed slows down its rate hiking trajectory, it might provide some relief to the emerging markets in 2019 and India shall also benefit from it. If the same trend continues, the rupee could stabilise around these levels giving a sigh of relief to policymakers.
The Reserve Bank of India (RBI) announces major open market operation (OMO) to soothe liquidity?.
In another important development, RBI announced OMO's of another 50,000 crore for December 2018 taking the total to Rs 1.75 lakh crore for the year. It's been one of the largest liquidity injections by the central bank in the past five years. Despite this, the inter-bank liquidity has been tight and is expected to remain till the end of December.
The liquidity in the banking system has been tight due to two major developments, first the RBI intervention in FX markets and second the unprecedented withdrawal of currency with the public. The total impact of both in 2018 has been around Rs 5 lakh crore. That explains the liquidity stress in the system. The government spending has helped the liquidity situation to the extent the WMA balances have come down from a surplus from 1.5 lakh crore to zero. That still leaves a shortfall of around Rs 1.25 lakh crore in the system which is reflective in the LAF numbers.
The bank credit growth has picked up in the past three months sharply after the NBFC's crisis through it's difficult to decipher as of now whether they are taking up the slack for NBFC's or there is genuine pick up in economic activity. We shall judge that only after a few months but the liquidity situation is expected to remain tight till March 2019 due to a host of factors mentioned above and also due to the general elections due in May 2019.
After a hostile market environment in 2018, there is a hope of revival in the Emerging markets if the Fed hints at an end of its hiking cycle and oil stabilises. India stands a chance of regaining ground after a lot of hiccups in 2018. After all, there is always light at the end of the tunnel.
MONEY CRUNCH
- Liquidity in the system has been tight due to the RBI intervention in forex markets and the unprecedented withdrawal of currency with the public
- The impact has been of Rs 5 lakh crore
The writer is head of fixed income, global markets, HSBC India
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In another important development, RBI announced OMO's of another 50,000 crore for December 2018 taking the total to Rs 1.75 lakh crore for the year. It's been one of the largest liquidity injections by the central bank in the past five years. Despite this, the inter-bank liquidity has been tight and is expected to remain till the end of December.
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