Impact of Tightening Liquidity on Financial Markets

Commercial Paper (CP) and Certificate of Deposit (CD) Rates

• Increase in CP Rates: CP rates have risen by 10-13 basis points (bps) in January, indicating higher borrowing costs for short-term funds.
• Increase in CD Rates: CD rates have increased by 20-30 bps across tenures, reflecting tighter liquidity. Current CD rates are between 7.40% and 7.51%, up from last month's 7.10% to 7.20%.

Liquidity Conditions

• Tight Liquidity: Systemic liquidity is constrained due to the Reserve Bank of India (RBI) interventions, leading to increased CP and CD rates.
• Liquidity Deficit: The liquidity deficit reached Rs 2 trillion as the RBI made payments on maturing buy/sell swap agreements without rollovers.
• RBI Forex Interventions: Heavy RBI intervention in the forex market to stabilize the rupee has further reduced rupee liquidity.

RBI's Potential Measures

• Combination of Instruments: According to Gaura Sen Gupta, the RBI might need to employ a mix of Open Market Operations (OMO), buy-sell swaps, and possibly a Cash Reserve Ratio (CRR) cut to infuse liquidity.
• Magnitude of Liquidity Infusion: The required liquidity infusion is substantial, necessitating the use of multiple instruments.

Additional Economic Observations

• Stakeholder Discussions: NFRA to release papers for audit questions; AIFs seek government funds for startups.
• Foreign Portfolio Investment (FPI) Trends: FPIs have withdrawn Rs 22,194 crore in January amidst a weak earnings outlook and rising dollar.
• Market Influences: Inflation data, Q3 earnings, and FII trading are expected to influence market movements.
• Market Valuation Impact: The market capitalization of five of the top-ten valued firms fell by Rs 1.85 trillion, with HDFC Bank significantly affected.