Liquidity surplus lifts G-sec demand, but global cues shape long-term yields
Positive (+) values denote liquidity surplus, and negative (-) values denote liquidity deficit. Liquidity signs are inverted for ease of interpretation Source: RBI, Crisil Intelligence
- Liquidity in the Indian banking system remained in surplus during May and June, although the surplus moderated intermittently due to tax-related outflows, currency leakage and the RBI’s foreign exchange operations. The central bank’s rate-cut cycle has also supported the expansion of India’s money market over the years. With the repo rate at 5.25% and the RBI actively managing system liquidity, banks continue to have access to low-cost short-term funds, which can be deployed into credit at attractive spreads. The RBI has also been encouraging banks to participate actively in the call money segment to ensure effective monetary policy transmission.
- The surplus in June also demonstrated the impact of liquidity-enhancing measures announced in the June monetary policy review meeting, along with durable liquidity injections. Continued liquidity support lifts demand for government bonds, which drives G-sec prices up and their yields down. However, India’s long-term bond market is becoming more sensitive to global markets. Even in the presence of domestic surplus liquidity, global yield dynamics and geopolitical conditions appear to have increasingly shaped the trajectory of domestic long-term rates.
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