When the Reserve Bank of India says it will cut liquidity, it means serious business. Coming up, from next week, is another massive measure to remove rupees from the system. In a notification today:
Over the last two months, the Reserve Bank of India (RBI) has instituted several measures to contain the volatility in the foreign exchange market. On a review of the impact of these measures and for effective liquidity management, it has been decided that the RBI will auction Government of India Cash Management Bills for a notified amount of Rs. 22,000 crore once every week on Mondays. The duration of the auction will be announced one day prior to the date of auction.
Funda is: The government will borrow using cash management bills. The money stays at the RBI, and therefore doesn’t go into the “system”. This takes out 22,000 cr. from circulation, so there’s that much lesser to go around.
Cash Management Bills will be of 34 and 35 days duration – if this is done every week, there will be about 88,000 cr. gone from the system until this system is unwound.
Expect even higher short term rates. Much higher, probably even as high as 12-14% for the ultra-short term. Liquid funds will suffer again, but now as they get more and more serious, the bigger impact will get visible: Defaults, shutdowns and a deep slowdown.
(We need it, but it’s like needing an injection – you don’t have to like it).