The Liquidity Question

The rupee going above the 60 mark created a lot of tension in the markets. The stickiness of the currency at levels above the comfort zone asked for intervention or measures to tame drastic movement. This is when RBI announced a slew of measures to shore up the battered currency. The measures revolved around the fundamental of tightening liquidity. But has it managed to do that?

An effective increase in interest rates and setting limits on the borrowing of banks from the RBI did immediately work the way. Although these measures raised concerns of subsequent adverse effects on local markets, the motive of currency control was clear.

Part of the programme was also to sell bonds aggregating Rs 12000 crore. However, the RBI managed to sell all of Rs 2500 crore worth of bonds because the yields demanded were too high, leading to a rejection of bids by the RBI. Eventually, it managed to suck out only a fifth of the liquidity it planned to. So what’s next?

The government’s bond auction on Friday will be keenly watched by investors and traders for further clues on prospective moves of the central bank. Whether the bond auction be able to pull liquidity out of the markets or not is the big question.

If it does, it would be in line with the expected plan but if it doesn’t, the central bank might have to resort to some other measures to serve the purpose. This may even involve a prospective raise in the CRR, which can be perceived as a measure too harsh for an economy that has been welcoming rate cuts and hoping for them to boost economic growth.

This situation is expected to cause downward pressure on the markets today. The uncertainty however willcause volatility in the markets till there is more clarity about the situation, which will come after Friday’s bond auction.

Global markets have been at record highs because of comments from Federal Reserve Chairman Ben Bernanke. This will provide some support for the markets leading to a positive bias. We hence expect the markets to see a positive opening but the day ahead to be volatile.