An interesting opinion in ET criticizing its approach to money markets. One thing i have to agree is money markets need to be deeper and RBI should be lot more active if it want to keep interbank rates closer to the policy rates. The articles goes like this:
MUMBAI: The Reserve Bank of India’s new liquidity management experiment backed by deputy governor Urjit Patil panel’s monetary framework has created more volatility in the money market than reducing it, making some believe that it is tightening of interest rates by stealth.
I like the comment- If the policy rate is 100 basis points below the effective then it is tightning by stealth.
Interbank rates for overnight money which are supposed to be closer to the policy rates, in this case the repo rate — the rate at which the central bank lends to banks — have been going widely off the mark in the past three months.
Overnight rates have been between 9.16% to and 7.4% in the past three months, and some days they were swinging wildly during the day, data from Bloomberg shows. This disturbs liquidity management, say traders.
I guess give the election took place and Market emotions swinging so widely(Yes even in money markets!!!!!!!!!!) may not the best period to do this analysis. We are now rather stable in term of political outlook. Possibly now we can put the role of RBI under scrutiny.
“The intent is to provide sufficient liquidity to the markets that means both shortterm liquidity is consistent with main aining the call money rate close to the policy rate,” said Raghuram Rajan, governor, RBI, in April.
But the central bank’s efforts through funding the market with term repos, i.e., funds for a longer duration, have not helped. Because the RBI, which believes that the banking system has to be deficient for its interest rate policy to be effective, is behind the curve.
I have to agree to this till the point Market is deep RBI has to supply the oxygen(Liquidity) whenever required.
RBI, which wanted banks to do better forecasting for funds, cut the funds available under LAF to 0.25% of total deposits, from an unlimited amount. “RBI wants banks to do better forecasting of funds,” said a trader who did not want to be identified.
“But I don’t think they have a model to get a sense of liquidity in the system. Or is it that they are tightening by stealth?” The central bank, which is moving its monetary policy framework to imitate the developed markets, when it comes to the market, appears to be ‘micro managing’ the market, say traders.
Also, RBI is confusing the system by selling bonds that reduce liquidity in the system and not releasing funds through repo to compensate for reducing export refinancing, they say.
I think RBI is selling the Bonds to sterilize the money it released to buy $. Remember the Forex at around $ 321 Billion is quite a record. and mind you inflation is still not in a zone where RBI( or the common men) can feel comfortable.
“There are questions on the credibility of what RBI is saying,” said another trader. “After cutting the refinance scheme, RBI has conducted just one repo on that count since June.”
The central bank’s rigid stance on how much cash reserve banks maintain on a daily basis is also causing strain in the overnight money market. In July 2013, to reduce the volatility in currency markets, RBI raised the daily CRR to be maintained to 99% from an average of 70%.
That was cut to 95% which is seen insignificant. “The minimum level of CRR that should be kept with the RBI should come down,” said a head of trading at an international bank.
“That will help banks plan their liquidity.”
This blog would like to see a balanced article.