The Reserve Bank of India (RBI) has announced significant measures worth $20 billion (Rs 1.5 trillion) to inject liquidity into the banking system, aiming to ease the stress in money markets. Leading brokerages indicated on Tuesday that the start of bond purchases is likely to drive rupee rates lower, thanks to the signaling effect and expectations that the RBI will avoid tightening liquidity conditions. This could potentially lead to more open market operation (OMO) purchases.
HSBC’s note highlights that the focus will now shift to the Union Budget on February 1, and more crucially, the RBI monetary policy committee (MPC) meeting on February 7. There are increasing prospects of a reduction in the repo policy rate, with HSBC Economics forecasting a 25 basis point cut.
“We expect OMO auctions to purchase government bonds to lead to a compression of term premiums, and we maintain our buy on 10-year government securities,” HSBC added.
The central bank will conduct three OMO purchase auctions of government bonds for an aggregate amount of $720 million (Rs 60,000 crore). These auctions, each worth $240 million (Rs 20,000 crore), will be held on January 30, February 13, and February 20.
Additionally, a six-month FX swap (USD/INR buy/sell swap) auction of $5 billion will take place on January 31, equivalent to about $5.16 billion (Rs 43,000 crore) of rupee liquidity. Furthermore, a long-dated variable rate repo auction (56-day) of $600 million (Rs 50,000 crore) will be conducted on February 7. This 56-day term ensures that banks’ liquidity needs are covered through the end-March period.
Emkay Global Financial Services noted that a turn in the liquidity cycle is a strong stimulant for domestic equities, with the BFSI sector being the best way to play this in the short term. “This is coupled with other positives—earnings forecasts have held up through January 2025, and valuations are now more reasonable. This may not be the absolute low for the markets, but we think it is a good time to start nibbling into stocks where valuations are now reasonable,” said Emkay Global.
Brokerages also suggested that additional liquidity measures and a rate cut in February would have a more substantial impact. “We believe, however, that this needs to be coupled with the easing of lending curbs imposed on banks and NBFCs since late 2023, especially on unsecured loans. This would bring back momentum to retail lending and inspire a consumption bounce back in the second half of CY25. Given that the space for fiscal stimulus is low, this should be an important countercyclical imperative,” Emkay Global noted.
