India: Liquidity withdrawal expected as RBI hike rates on 7 Jun 22

• Measures to tighten liquidity are expected to accompany a rise in Indian interest rates on 7 Jun 22, adding upward pressure to bond yields and increasing the need for central bank measures to support government borrowing.
• The rise in interest rates is not in doubt, because the governor of the Reserve Bank of India (RBI) said on 23 May 22 that the decision would be a “no brainer”.
• Economists polled by Reuters expect a rise of 25 to 75 basis points. It will follow a 40-basis-point rise in May 22 that kicked off the central bank’s tightening cycle, which economists expect to be relatively short.
• The market is pricing in an increase of about 50 basis points on 7 Jun 22. Analysts also expect the RBI to reduce liquidity, reinforcing its fight against inflation and extending its effort to return monetary conditions to what they were like before the pandemic prompted radical action to stimulate the economy.
• Radhika Rao, senior economist at DBS said: “Further CRR increases are on the cards to lower the liquidity surplus and aid transmission” – that is, to assist rises in interest rates to affect the economy.
• Tighter liquidity will add upward pressure to bond yields. The benchmark 10-year yield has already risen more than 100 basis points in 2022, driven higher by global oil prices and rising expectations for short-term interest rates.
• “Asset purchases through G-SAP (the government securities acquisition program) could be reintroduced if the central bank felt this was warranted to contain fiscal risks,” said Shilan Shah, senior India economist at Capital Economics.
• Bond traders will look for clarity from Das on specific steps the central bank plans to undertake to keep the government’s borrowing costs down. The 10-year bond yields touched 7.5% on 6 Jun 22, for the first time since 2019.
• The market is also worried about extra borrowing after the government’s fiscal package, but the current inflationary and liquidity backdrop may not allow the RBI to conduct any immediate secondary market bond purchases, said Citibank’s analysts including Samiran Chakraborty, who said the 10-year bond yields may approach 8%.
• “The bond market is already positioned for front-loaded rate hikes,” said Pankaj Pathak, fixed-income fund manager at Quantum Asset Management Co. Any smaller rate hike than the expected 40-50 basis points will be a “positive surprise,” leading to marginal softening of short-term bond yields.

External Link : https://www.reuters.com/world/india/liquidity-withdrawal-expected-india-cenbank-hikes-rates-wednesday-2022-06-06/

External Link : https://www.bloomberg.com/news/articles/2022-06-06/india-rate-hike-is-just-a-matter-of-how-much-decision-guide