Measures for Liquidity Tightening To Keep Monetary Rates Elevated: Ind-Ra
Moneylife Digital Team 24 August 2023
Banking system liquidity has been affected by the liquidity tightening measures adopted by the Reserve Bank of India (RBI) in the August monetary policy meeting. If the incremental cash reserve ratio (ICRR) requirement continues in September, tightness in the system liquidity will aggravate meaningfully owing to quarterly advance tax payments and monthly goods & services tax (GST) payments during the second and third week of September. Although that will be temporary, a research note says the tightness will be critical to watch for.
In its credit market tracker report, India Ratings and Research (Ind-Ra) expects RBI to take a calibrated approach to withdraw the ICRR requirement starting in September. The report comments on the systemic and market liquidity of the banking system and trends in debt and money markets. 
RBI asked banks to maintain an ICRR of 10% on the incremental net demand and time liabilities (NDTL) for the period of 19 May 2023 and 28 July 2023, effective from 12 August 2023. "The move seems to have mopped up around Rs1tn (trillion) from the system (base money). Consequently, the banking system liquidity receded to around 0.5% of NDTL from an excess of an average of 1% of NDTL. Subsequently, short-term rates have increased by 25-40bp (basis points)."
At the same time, according to the rating agency, issuances of certificates of deposits (CDs) have remained strong, while commercial paper (CP) issuance rates have gone up. "With the implementation of ICRR for a brief period, the tightness in the banking system liquidity is cropping up," it says, adding, "As a measure to address this additional fund, private banks have resorted to issuing CDs, especially banks with relatively less access to easy to deposit. Public sector banks' CD issuances sharply fell in August 2023 to Rs148bn (billion) as of 21 August 2023 compared with Rs346bn in July 2023 while private banks raised around Rs127bn as against Rs105bn raised in the previous month."
Due to improved working capital requirements, Ind-Ra says the CP requirement of corporates seems to have stabilised. Corporates raised Rs248bn through CPs as of 21 August 2023 against Rs286bn raised in July 2023. CP issuances by non-banking finance companies (NBFCs) and housing finance companies (HFCs) stabilised at Rs308bn as of 21 August compared with Rs392bn in the past month. 
Overall, the rating agency says it expects the activities to remain at the current level, and CP issuances by non-banks are expected to gain further traction in the coming weeks with the onset of the festive season.  
According to Ind-Ra, after strong inflows into the domestic equity market for the past three months, foreign portfolio investment (FPI) flows to the equity market seem to have moderated. "The total FPIs to equity and debt markets reduced to US$1.90bn as of 21 August 2023 from the average inflow of over US$6bn between May to June 2023. Inflows in the debt market inflow have seen an improvement in August at US$0.73bn billion from US$0.45bn in July 2023."
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