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RBI Really Means Business; Takes Upto 88,000 cr. out via Cash Management Bills

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).

  • ram says:

    Will bank stocks fall on Monday ?
    what will be the effect in Bank stocks and Bank nifty on Monday because of this action taken by RBi ?
    reply ?

  • Rahul T says:

    Is it good time to get out of Liquid funds by tomorrow ?

  • Arch says:

    Knowing the debt funds are going to take a hit again whats the best strategy for an investor who is already invested in liquid, ultrashort term and short term funds. Withdraw all the money and wait for the nav to go down? and maybe invest back?

  • fubar says:

    So the Indian QE rollback has begun!

  • Bless says:

    Does this mean the end for competitive returns on cash / liquid funds in the short term (3 months)? Do you think its wise to shift to FDs or longer term debt funds for better returns on lesser risk?

  • lohit says:

    I am guessing that unless one needs the money, we should continue to stay invested in liquid and ultra-short term funds. In the long run, the higher rates will compensate for the initial NAV fall.
    Deepak is the expert, so I will defer to him for a more authoritative answer.

  • Shiva says:

    My 2 cents! Stay put, no need to panic. I don’t think that
    this measure wouldn’t have as much effect as the July 16th one.

  • Gold Bug says:

    Seems RBI may run out of ammunition. Rate rate inevitable?

  • Jose says:

    These are very good moves keeping the long term interest of our country. With US Tapering coming soon & bond yields in the US starting to move up, the predictions are it will move to 4 – 6 % from 2.65 % now..So the typical India India spread is 700 basis points, so we must see a 11 – 13 % Yield coming our way soon. We closed @ 8.24 % on Friday. get ready for a BankNifty fall going on till Result season in October, post that there will be some relief. Would be good to look at buying / entering Banks / Bond funds some where there..Till then Pain in Banks & economy to only continue. Its good India is being proactive…Mind you Raghuram Rajan was one one who questioned Ben Bernanke & Alan Greenspan on the QE mode & also predicted the Housing collapse in 2007 while in IMF. So he know what is coming globally. He is focusing on Macro’s and not growth..Righfully so. Cheers & hats off to RR for respecting basics of economics.

  • Ramamurthy says:

    My belief is,as long as you invest in liquid Funds, only for purposes of temporary parking of funds, it is good.It gives a better return than keeping the money in SB a/c and the liquidity is very high.But. as a long term investment it is not a good idea.
    Do you agree with this please because I have right now some temporary surplus funds which I want to move from SB a/c.Reply will be much appreciated.

    • Shiva says:

      Liquid fund typically have 20-30 days duration. Even if they are hit ( like what we saw on July 16), they will be able to recover quickly( due to their low duration) and adjust to the new rate. Current yield in liquid funds is around 9-10%. So you can stick to liquid funds which will still have better returns compared to the 4% you get in your savings account. Debt funds will be a bit risky given the uncertain interest rate environment.