RBI: Will ensure liquidity

Following Standard & Poor’s downgrading of the long-term US sovereign rating from AAA to AA+, with negative outlook, on Friday, government securities and foreign exchange markets saw volatile trade on Monday. While the rupee weakened to its lowest in five weeks during early trade, bond yields fell to a three-week trough, as investors sought safe-haven government securities.

Anticipating volatility in financial markets, the Reserve Bank of India (RBI) issued a statement before the start of trade on Monday to calm investors. It said it was the central bank’s priority in the immediate future to maintain rupee and forex liquidity to prevent volatility.

The rupee depreciated, tracking weakness in equity markets. It closed at a near-six-week low of 44.98 against the dollar, after trading in the range of 44.90-45.06. At the close on Friday, the rupee saw a weekly loss of 1.26 per cent—the biggest weekly loss in the last three months.

Yields on the 10-year benchmark government bond traded between 8.21-8.28 per cent before closing at 8.26 per cent on Monday, lower than Friday’s close of 8.31 per cent. Bond yields also fell, as a fall in crude oil prices softened the outlook on domestic inflation, weakening a case for further monetary tightening.

According to the central bank, though India is not insulated from global developments, during the worst phase of the recent global financial crisis, the growth was 6.8 per cent, showing high resilience to the crisis, owing to from domestic factors.

“While downside risks to growth may have increased in the wake of global developments, they are likely to have limited impact,” the central bank said. RBI said it was monitoring the global situation and would “respond quickly and appropriately to the evolving situation”. India’s foreign exchange reserves currently stand at more than $300 billion.

“As regards forex liquidity, in anticipation of financial market turbulence related to the US debt ceiling impasse, the Reserve Bank of India made an assessment of the ability of the forex reserve portfolio to meet potential forex requirements in the event of significant capital outflows. This exercise indicated there were sufficient liquid reserves to meet the demand for forex, even in stress scenarios,” it said. According to RBI, the banking system does not face any immediate liquidity stress and banks can borrow by pledging government bonds. They can also avail of the marginal standing facility.

“There has been substantial global risk aversion after the US downgrade. RBI, in on Monday’s statement, said it would respond if global uncertainty worsens, which means RBI is willing to change its stance. Still, it is too early to take a big call. The markets are assigning a probability that RBI may change its stance. The yields would be range bound and any uptick would be bought into. I expect yields to range between 8.20-8.35 per cent,” said Vivek Rajpal, India rates strategist, Nomura.

Source: Business Standard