What Experts And Analysts Made Of RBI’s New Liquidity Framework

Watch | Ananth Narayan On RBI’s New Liquidity Framework

The Reserve Bank of India on Thursday released its new liquidity framework, signalling an easier liquidity stance but only if financial conditions warrant. That according to analysts and experts is broadly in line with the previous framework.

According to RBI, the liquidity framework should entirely meet the liquidity needs of the system; there should be one single overnight variable rate operation in a day; and build-up of a large deficit or surplus, if expected to persist, should be offset through open market operations, forex swaps, long-term repo operations at market rate, among others.

Here’s what analysts and experts made of the new RBI liquidity framework.

Kotak Institutional Equities

• Recommendations of RBI’s new liquidity framework broadly in line with the existing framework.
• Key notables are preference to maintain system liquidity at a deficit of 0.25-0.5 percent of net demand and time liability, and unlimited window of liquidity under the single overnight variable rate.
• Liquidity deficit stance, along with the preference of longer-term variable repo rates over open market operations will be negative for the bond market.
• Framework allows for flexibility if financial conditions warrant, maintaining a liquidity surplus in the near term, keeping hopes of OMO purchases alive.

Bank Of America Merrill Lynch

• RBI’s new liquidity framework limits 2018-type liquidity crunches by capping the system liquidity deficit.
• Assuming the report is implemented by December policy meeting, some RBI liquidity operations are expected:

1. Provide $35-40 billion ($10 billion fiscal year-to-date) of durable liquidity in FY20 to fund 13-14 percent loan growth with a 50-basis-points rate cut. This should be met by OMO ($7.5 billion fiscal year-to-date).
2. Fund a part of the additional central borrowing of Rs 80,000 crore through long-term repo operations/surplus RBI capital identified by the Bimal Jalan committee.

CLSA

• This liquidity framework not only sets broad guidelines for liquidity management by RBI, but also emphasises the need to communicate it to the market.
• While broad principles are in line with current practices, better liquidity predictability and RBI’s responsiveness will help banks manage growth and margins better.

Ananth Narayan, associate professor (finance) at SPJIMR

• Market will be slightly disappointed; the report reflects the tension between new and old RBI.
• Some relief as the central bank says liquidity conditions can be eased.
• Market has been advocating for liquidity framework to be adjunct to monetary policy.
• This report completely negates the liquidity being linked to monetary stance.
• Retaining weighted average call rate as a liquidity measure is a disappointment as it is a very poor liquidity metric.
• One expectation was if the framework allowed for consistent liquidity surpluses, that would have given far more leeway for the RBI to conduct OMOs.
• Under surplus liquidity conditions, the RBI will find it difficult to purchase bonds/conduct OMOs.
• As the framework is not clear on surpluses, it’s not clear if OMOs can happen automatically.
• Preference of long-term repos over OMOs will not be good news for bond markets.