Vivek Rajpal, rates strategist at Nomura India, talks about the steps taken by the Reserve Bank to infuse liquidity into the system. He says: "We will head into the new fiscal year with a total core system liquidity deficit of neutral level if we get one more OMO, which effectively means that liquidity worry will go away in the month of April." Below is the verbatim transcript of Vivek Rajpal's interview with Latha Venkatesh on CNBC-TV18.
Latha: This is it, it was a very good inflation number, one would have expected a little more, looks like the market is still pricing in only one rate cut of 25?
A: There are two important developments that happened yesterday. One, as you said, headline consumer price index (CPI) was lower than expected, which effectively cements the rate cut expectation for April 5. Number two, Reserve Bank of India (RBI) came out with open market operations (OMO) of Rs 15,000 crore. Last two times RBI has clearly surprised positively as far as liquidity management is concerned or as far as OMO buyback is concerned. This shows that they are becoming proactive in terms of liquidity infusion, which goes hand-in-hand with their current accommodative stance. My sense is a rate cut expectation on April 5 along with this proactive liquidity management will take the 10-year bond yield to 7.50 as we head towards March 31.
Latha: Is this all that proactive? The market is already so deeply negative in terms of liquidity and now advanced tax outflows start today, so the bond market — this is barely enough, isn't it? Shouldn't there be a couple of them for the markets to pass on yields? I guess that is why it is only 2 basis points.
A: There are two aspects. There is a core system liquidity deficit and there is a banking system liquidity deficit. OMO or bond buyback is a permanent liquidity infusion whereas the current liquidity deficit in the banking system is largely on a temporary factor and will be for 15 days up to March 31. So, if they get over aggressive for example then they may lose the control on the operating rate as we head into April. So they will have to be careful about it.
There is a lot that needs to be done as far as liquidity management framework is concerned but frankly relative to my expectations, a month back they have positively surprised. If my calculations are correct, we will head into the new fiscal year with a total core system liquidity deficit of neutral level if we get one more OMO, which effectively means that liquidity worry will go away in the month of April.
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