RBI/Govt does a U turn its tight policy

RBI’s policy continues to be chaotic and confused. It is not really sure what it was doing earlier. Just reacting to whatever is happening in markets.

All this while it has been sleeping on debt market woes. Now, it has suddenly woken up as news of Rs 45,000 Cr loss in bank’s bond market position started to float around.

So in its new measures (yet another new policy) it has decided to support bond markets. So has it given up on Rupee? In that case these recent measures will also fail as markets are tracking Rupee movement more than anything else.

It has taken two  measures:

1. Provide liquidity to markets via OMO purchases worth Rs 8000 Cr. Well just till yesterday  it was tightening liquidity and suddenly says:

On July 15, 2013, the Reserve Bank of India had announced measures for liquidity tightening in order to raise the short-term interest rate and thereby curb volatility in the exchange rate. These measures were recalibrated on July 23, 2013. A review of these measures suggests that the immediate objective of raising the short-term interest rates has substantially been achieved as evidenced by the money market rates anchoring to the marginal standing facility (MSF) rate of 10.25 per cent. Going forward, the Reserve Bank will calibrate the issue of cash management bills (CMBs), including scaling it down as may be necessary, to keep the money market rates around MSF rate until the volatility of rupee eases.

It is important to address the risks to macroeconomic stability from external sector imbalances. At the same time, it is also important to ensure that the liquidity tightening does not harden longer term yields sharply and adversely impact the flow of credit to the productive sectors of the economy. It may be recalled that in its first quarter monetary policy statement of July 30, 2013, the Reserve Bank had said that the stance of its monetary policy is intended, among other things, “to manage liquidity conditions to ensure adequate credit flow to the productive sectors of the economy.” 

Really? Till now it kept saying the measures do not imply tightening of mon policy but was seeing yields just shooting.  So

2. As bond players have bleeded it has decided to let banks manage their MTM losses by shifting securities to HTM category. Also slow the process of bringing HTM to SLR ratio.

  • Current regulations require banks to bring down their statutory liquidity ratio (SLR) securities in held to maturity (HTM) category from 25 per cent to 23 per cent of their Net Demand and Time Liabilities (NDTL) in a progressive manner in a prescribed time frame. The requirement stood at 24.5 per cent as at end June 2013. It has now been decided to relax this requirement by allowing banks to retain SLR holdings in HTM category at 24.5 per cent until further instructions.

  • Further, banks will now be allowed to transfer SLR securities to HTM category from available for sale (AFS) / held for trading (HFT) categories up to the limit of 24.5 per cent as a one-time measure. Such transfer of securities from AFS/HFT category to HTM category should be made at the lower of the book value or market value. Banks have the option of valuing these securities for the purpose of such transfer as at the close of business of July 15, 2013.

  • In addition, banks can spread over the net depreciation, if any, on account of MTM valuation of securities held under AFS/HFT categories over the remaining period of the current financial year in equal instalments.

Guidelines on HTM/AFS are here. Will try and issue a primer in sometime..

All these dramatic reversals bring more nervousness as one is never sure of what is in order and what is coming next. Just when markets believed these tight policy is here to stay comes a reversal almost in form of an apology.

Markets are likely to take a breather but a lot will depend on how Fed goes about its FOMC policy. Any announcement of tapering could bring further troubles for Indian economy. Though it will give more excuses to our policymakers.

Have been hearing and reading on many suggestions but am not sure. It is easier said than done. There is no magic wand and one has to get through the pain. I really do not know how this vicious cycle will be broken.

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One Response to “RBI/Govt does a U turn its tight policy”

  1. Vivek Says:

    On point 1, the buying will be in the long end. You had an article about the yield curve being inverted and whether it will have recessionary implications like in the US.

    What is strange is that with this new policy, RBI is trying to bring down long rates and thereby further invert the curve. Operation twist has usually been done in the US with a normal yield curve prevailing. I guess, we are going to find out in the next year what an inverted curve does for the Indian economy.

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