India will conduct open-market debt purchases next week for the first time since June to ease a shortage of cash in the banking system.
The Reserve Bank of India will offer to buy on Dec. 4 as much as 120 billion rupees ($2.2 billion) of notes due in 2018, 2020, 2022 and 2027, the monetary authority said in a statement yesterday. Borrowings by lenders from the central bank have exceeded 1 trillion rupees a day for the past 11 days, indicating a cash squeeze. Banks borrowed 1.01 trillion rupees from the central bank yesterday, according to official data.
“With repo borrowings consistently above one trillion rupees and the 10-year bond yields edging higher, the bond buying was anticipated,” said J. Moses Harding, executive vice president at IndusInd Bank Ltd. in Mumbai.
India’s 10-year sovereign bond yield has climbed 17 basis points to 8.21 percent from a 14-month low of 8.04 percent in June.
Funds at Indian banks declined because of slower government spending and a surge in customer withdrawals during this month’s festival season, according to Fullerton India Credit Co., which is owned by a unit of Singapore’s state-owned Temasek Holdings Pte, and Nomura Holdings Inc., Japan’s largest brokerage. The Hindu festival of Diwali was celebrated on Nov. 13.
The Indian government had a cash balance of more than 700 billion rupees as on Nov. 22, two finance ministry officials with direct knowledge of the matter said last week. That indicates the government scaled back spending, according to Vivek Rajpal, a fixed-income strategist in Mumbai at Nomura.
Local lenders borrowed an average 931 billion rupees a day from the Reserve Bank of India this month, compared with 671 billion rupees in October, official data show. The central bank has bought 820 billion rupees of debt since April 1 to boost the availability of funds.
Cash at banks may decline further as companies pay quarterly taxes by Dec. 15, according to Arvind Chari, a senior fund manager at Quantum Asset Management Co. in Mumbai. That may drain between 500 billion rupees to 650 billion rupees from the financial system, he said.
IndusInd’s Harding predicts the RBI may announce a further reduction in the amount of cash banks need to set aside as reserves, last cut by a quarter of a percentage point to 4.25 percent on Oct. 30, to overcome the cash crunch.
The cash reserve ratio has been cut by 175 basis points this year.
“A CRR cut would be required as the bond purchases in itself won’t be enough to satisfy the liquidity deficit,” said Harding, who predicts the 10-year bond yield may touch 8.15 percent next week.
The RBI will buy 8.24% 2018 bonds, 8.19% 2020 securities, 8.15% 2022 notes and 8.28% 2027 notes.