Convertible Bonds - Part 8 - How to Invest (How to Invest into

Liquidity at Rs 150,000 crores deficit is higher by Rs 80,000 crores over RBI’s comfort zone of around Rs 60,000 crores to Rs 70,000 crores deficit. The demand for funds from the RBI had gone up Rs 70,000 crores over the last four months, despite RBI infusing Rs 61,000 crores of primary liquidity into the system through OMO (Open Market Operations) bond purchase auctions. RBI’s bond purchases and government spending have failed to bring down liquidity deficit. Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) of the RBI averaged over Rs 150,000 crores on a daily basis last week. In fact RBI has sounded that the CRR cut is a precursor to cuts in repo rate down the line. The RBI has been forced to step in to contain the impact of higher government borrowing on both liquidity and bond yields. RBI cited tight liquidity conditions to undertake a series of bond purchase auctions, which in effect is turning out to be back door deficit financing. Inflation is expected to trend down to below 7% in March 2012 as per RBI’s expectations even though there is some upside risks to inflation in the form of higher power tariffs (due to increase in input costs such as coal prices) and pass through... The market rally has more steam left given expectations of further rate cuts down the line but the fact that RBI is now becoming more tied to the government is worrying and is a factor to watch out for in the coming months. RBI cited reasons of a sticky non food manufacturing inflation, which at over 7% levels is higher than the long term average of 4% for not cutting repo rates.

Overnight drawings by banks from the RBI's liquidity adjustment facility have exceeded  1,20,000 crore and it has said in the past that the deficit has exceeded its target of 1 percent of Net Demand and Time Liabilities (NDTL). The Reserve Bank (RBI) bought bonds worth  10,435 crore through Open Market Operations (OMO), against a target of  12,000, as part of its strategy to infuse liquidity into the system. Four securities were on offer for OMO and the RBI subscribed to all of them, the central bank said in a statement. OMOs are the "first preference" of the RBI for injecting liquidity and there is an opportunity to raise up to  2. Subir Gokarn, RBI Deputy Governor, had earlier said that liquidity is likely to be under pressure for some more time on account of factors such as advance tax payments.

Even if RBI does not sell dol- lars any more, the liquidity shortage will continue, and to tackle this and ensure that the government's annual borrow- ing programme is not affected, RBI has been infusing liquidity by buying bonds from banks under... Most analysts agree the growth projection will be pared (no one will be sur- prised even if RBI pegs it at 7% “with a downward bias“) and there will not be any rate cut, but the market is divided on whether RBI should go for a cut in banks' cash... Even though the average SLR holding of the banking industry is around 29% (against the reg- ulatory norm of 24%), not all banks have excess government bonds in their portfolio, and hence they need to pay more to borrow from RBI. CRR is the portion of deposits banks need to keep with RBI, and under SLR norms, banks must invest at least 24% of their de- posits in government bonds. Since SLR is 24%, they must have higher investment in gov- ernment bonds to be able to borrow from the repo window, and those who don't have that can bring down their SLR port- folio to 23% and borrow under MSF at a higher rate. Since March 2010, RBI has raised its key policy rate 13 times and kept the financial system in a cash-deficit mode to make the repo rate effective. It's fairly certain that the Re- serve Bank of India (RBI) will pare its growth forecast for the Indian economy when it announces its quarterly re- view of monetary policy on Tuesday. 5% to borrow from RBI under the so-called marginal standing facility (MSF). For every dollar RBI sells, an equivalent amount of rupee leaves the system. 26 trillion every day from RBI's repo window this month. 3 billion worth of dollars, and if one takes into account its dollar sale in December (data for which is not available as yet), the total sale could be at least $8 billion. One of the reasons behind this is RBI's dollar sale.

The demand for funds from the RBI had gone up by Rs 70,000 crore over the last four months, despite the RBI infusing Rs 61,000 crore of primary liquidity into the system through OMO (open market operations) bond purchase auctions. The liquidity deficit of 150,000 crore is higher by Rs 80,000 crore over the RBI’s comfort zone of around Rs 60,000-70,000 crore. Liquidity, as measured by bids for repo in the LAF (liquidity adjustment facility) of the RBI averaged over Rs 150,000 crore on a daily basis last week. Credit growth, at below 16 percent, is well within the RBI’s target of 17 percent for 2011-12. The markets are enthused by the Reserve Bank of India’s (RBI’s) cut in the cash reserve ratio (CRR), with equity, bonds and currency rallying. The RBI’s bond purchases and government spending have failed to bring down the liquidity deficit. The RBI has been forced to step in to contain the impact of the higher government borrowing on both liquidity and bond yields. Inflation is expected to trend down to below 7 percent in March 2012 as per the RBI’s expectations even though there is some upside risk in the form of higher power tariffs (due to increase in input costs such as coal prices) and the pass-through... It has cited sticky non-food manufacturing inflation, which at over 7 percent levels, is higher than the long-term average of 4 percent, for not cutting repo rates. The rupee is still down over 10 percent against the US dollar over the last four months despite a rally of close to 5 percent in the month to date.