No liquidity worries seen in bond markets

MUMBAI: The Reserve Bank of India (RBI) is set to reverse its spree of unwinding bonds under the market stabilisation scheme (MSS). After unwinding bonds worth around Rs 18,000 crore during November and December, the central bank has sold bonds worth Rs 8,000 crore in its last four working days indicating the return of easy liquidity conditions.

The central bank on Wednesday sold 182-day treasury bills worth Rs 1,000 crore and 91-day treasury bills worth Rs 3,000 crore under the MSS on behalf of the government. Earlier, last Friday too it sold treasury bills worth the same amount, taking the total amount to Rs 8,000 crore in four days. Though official figures are not out, back of the envelope calculations indicate that outstandings under MSS with the central bank has again gone up to around Rs 1,68,000 crore.

According to a senior treasury official with a private bank, the recent spurt in MSS indicates improvement in liquidity which the central bank is mopping up. Though there is not a significant pick-up in foreign portfolio investment, this time of the year, there tends to be sigzeable provident fund (PF) inflows in the system, he pointed.

The central banks uses MSS bonds floated by the government to manage liquidity generated out of forex inflows (whenever there are forex inflows, the central banks buys foreign currencies and releases rupee funds. The central bank, in turn, mops up the rupee funds by sale of bonds in order to maintain desired level of liquidity in the system).

In the current financial year, the central bank has been mopping up huge inflows. Since April 2007, the central bank has mopped up inflows worth $76 billion, or rupee equivalent of Rs 2,18,775 crore, according to the latest official figures. The outstanding MSS, which was around Rs 62,000 crore in early April, has touched Rs 1,77,838 crore in early November. The government increased the threshold limit for bonds to be issued under MSS thrice during the year. It more than doubled the ceiling from Rs 1,10,000 crore in April this year to Rs 2,50,000 crore now.

However, the central bank subsequently started unwinding MSS, with this touching Rs 1,59,717 crore as on December 28, 2007 as inflows slowed down which led to tight liquidity conditions. The central bank had to release liquidity additionally by selling government bonds as well. One of the major contributor in slowdown of inflows was foreign investors went slow during the period.

Also the Indian diaspora brought in less money through the NRI deposit route. Even the liquidity generated through credit flows in the economy has slowed down as bank lending has not picked up. Interestingly, after showing a strong growth in Q2 2007, bank loans have not kept that tempo in Q3. Also, the government not resorting to any spending, instead choosing to park huge funds with the central bank, largely in order to contain its fiscal deficit figures. But treasury officials see a surge in capital inflows in the coming weeks.

This according to them is on account of huge line up of many big-ticket initial public offerings that are set to hit the market in the coming months. In addition to foreign capital, a huge domestic interest is also expected in these issues.