Analysing the implication of RBI measures to address market conditions

[Rajesh Desai]

The RBI has announced a series of measures late evening today to address market conditions by limiting the impact of the various liquidity tightening measures taken as part of the interest rate defense for the currency. Measure: OMO purchase of INR 80 bn on Aug-23 Context: Hardening of long term yields and rising liquidity deficit adversely impacts the credit flow to productive sectors of the economy Intent & implication: Will ease pressure on longer-dated yields and increase inversion of yield curve Measure: CMB purchases to be calibrated and scaled down if necessary Intent & implication: Will ease the liquidity situation somewhat though the banks' dependence on MSF borrowing will continue to persist and call will trade close to MSF rate Measure: Relax banks' HTM requirements at 24.5% of NDTL until further notification. Banks are also allowed to transfer securities from AFS/HFT to HTM up to 24.5% limit as a one-time measure. Intent & implication: To limit banks' accounting losses on their SLR investments in their trading portfolio Impact of the measures on Rupee Today's announced measures are more aimed toward providing stability in the fixed income markets and therefore likely to support INR from a sentiment perspective. Meanwhile, from a medium term perspective, we believe that sustained FX stability can be achieved through a.) encouraging stable capital flows and b.) reducing the current account deficit. We maintain our Rupee forecast and expect it to trade with a floor of 59-60 in the near term Please refer to the attached document for details. Regards, ICICI Bank : Treasury Research Contact: Kanika Pasricha: (+91-22) 26531414 (ext 2260)

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CA. Rajesh Desai