Two critical announcements by RBI would have a bearing on the money market liquidity trajectory in the coming months.
Download ReportQuantEco Research || MARKET Musings - RBI's liquidity salvo
The RBI made two critical announcements on May 19th, both of which would have a bearing on the money market liquidity trajectory in the coming months. The central bank will transfer Rs 874 bn as surplus to the central government for FY23 and Rs 2000 denomination currency notes will be gradually withdrawn from circulation, although they would continue to remain legal tender. Both are intricately linked to money market liquidity, with the former having a deterministic impact, while the latter carries a potential impact depending upon behavioral outcomes of economic agents. In either case, core liquidity would benefit and is now likely to be less of a concern in the coming months. For the bond market, this can turn out to be a double-edged sword. On one hand, the generation of modest fiscal buffer and comfort on liquidity could see a kneejerk rally, while on the other hand, market expectations of the likelihood of OMO purchases in H2 FY24 will now get faded, thereby reigniting the prominence of g-sec supply concerns.