By Dharamraj Lalit Dhutia
MUMBAI (Reuters) - India's central bank is unlikely to undertake any bond purchases or reduce the cash reserve ratio and may instead prefer to stick to term repo auctions to add funds to the country's banking system, analysts said.
India's banking system liquidity slipped into deficit for the second time in one week on Tuesday. It dipped into deficit for the first time in nearly 40 months last week.
"The RBI may look at conducting 14-day or 28-day term repos and not opt for any permanent measure. They may not prefer doing outright open market purchases or cutting the cash reserve ratio," said Vijay Sharma, senior executive vice president at PNB Gilts.
"Some people are expecting OMOs (open market operations), but I do not endorse that view. For the next two to three months, they may stay with term repos."
Market participants also expect liquidity to oscillate between surplus and deficit based on the extent of inflows from government spending.
The RBI conducted an overnight repo last week and infused 500 billion Indian rupees ($6.11 billion) to help banks meet their funding needs, but has not intervened apart from that.
Traders will keep a close watch for any liquidity-focused commentary from the central bank at its monetary policy decision this Friday.
The RBI's aim is to ensure that repo remains the operational rate through the weighted average call rate and liquidity will need to remain tight to sustain that, said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
"We do not see any scope for liquidity easing measures in the current environment. Instead, any frictional tightness should be addressed through more frequent-term repos."
India's weighted average call rate has stayed over 5.60% since the middle of September, while the RBI's repo rate stands at 5.40%.
Apart from tax outflows, systemic liquidity has also come down drastically in the last few weeks due to the RBI's increased intervention in the foreign exchange market to cap the slide in the local currency.
"At a time, when the currency is getting hammered and touching record lows, it will be very tough for the central bank to undertake any move which will increase rupee liquidity," a trader with a bank said.
"In fact, the tightness could be a blessing in disguise for managing the rupee."
The Indian rupee fell to record low of 81.9350 earlier this week and is expected to remain under pressure, like other currencies, given the strengthening dollar.
Some market participants also believe the RBI may cut down or even stop conducting long-term variable rate reverse repos.
The RBI currently withdraws money from the banking system through 14-day and 28-day variable rate reverse repos (VRRR) auctions of an aggregate of 2.50 trillion rupees.
"Currently, the stance of the policy is hawkish. Unless they turn neutral, it is difficult for them to start infusing permanent liquidity. They may also stay away from conducting large-scale reverse repos and may stop VRRR for some time," said PNB Gilts' Sharma.
Graphic: India's banking system liquidity-https://graphics.reuters.com/INDIA-MARKETS/LIQUIDITY/gdpzyzqyovw/chart.png
($1 = 81.8750 Indian rupees)
(Reporting by Dharamraj Lalit Dhutia; Editing by Savio D'Souza)