The Reserve Bank of India (RBI) has announced that it will buy an additional Rs 400 billion worth of Government securities (G-Secs) in December, in addition to the Rs 400 billion set to be purchased in November.
According to CARE ratings, Rs 1286.6 billion worth of OMO purchases took place between April 01 and November 23, of which Rs 980 billion wwas purchased in the last three months.
The banking sector is facing its seventh consecutive week where there is a liquidity deficit, says CARE Ratings, as the average net liquidity deficit widened by Rs 210 billion to Rs 1.11 trillion for the week ended November 23.
"Faced with a stressed liquidity position that has made fund raising from the markets challenging, the NBFC sector has been increasingly turning to banks for their fund requirements. Incremental credit offtake to the sector during Aprril to September rose to 10.12 per cent from -1.25 per cent during April and August 2018. The increased demand for funds by NBFCs has been impacting liquidity in the banking system," says Madan Sabnavis, Chief Economist at CARE Ratings.
In FY2019, OMO purchases by the RBI closed at Rs 900 billion while so far this year they have conducted Rs 1286.6 billion worth of OMO purchases. With the latest announcement, OMO purchases by December end would cross Rs 1500 billion.
Stemming from the default of Infrastructure Leasing and Financial Services (IL&FS) in September, on various debt instruments including commercial papers (CP), bonds and loans, the financial sector has been facing a liquidity crunch for the last eight to ten weeks.
Further, asset-liability mismanagement issues in the housing finance companies and non-banking financial companies (NBFC) space further pushed concerns in the market of a liquidity shortfall.
The RBI has since taken several measures like OMO purchases and have eased the rules concerning refinancing for NBFCs to stem market widen concerns surrounding systemic liquidity.
Further, major banks like State Bank of India announced that they would be making sizeable purchases of loan portfolios, or securitisation transactions worth Rs 40 billion by end of this fiscal, from NBFCs.
Analysts say both moves have pushed inflow of funds to NBFCs as they also rethink their borrowing mix, now relying more on bank loans, debenture issues and external commercial borrowings, and securitisation, to raise funds.
Over-borrowing from short-term debt market instruments like CP issuances came down in October from a year ago, but have since reached the pre-crisis levels in November.
According to investment management firm Bernstein, while CP issuances are still low, the market is receptive to clearing the CPs of NBFCs. Companies like India Infoline, Piramal and India Bulls Housing Finance have raised CPs and vehicle finance lenders are seeing high demand, the report says, as NBFCs and HFCs continued to issue the lion's share of CPs.
In August, the average fortnightly CP issuance rate grew to a high of Rs 1.5 trillion, thereafter it declined to Rs 1.1 trillion in September and Rs 900 billion by October.
CP issuances jumped back to Rs 1.1 trillion by the first week of November, according to Bernstein.
Analysts, however, fear that market sentiment is driving the NBFC and HFC stocks as they continue to be under-pressure and liquidity does not ease throughout the system, despite the central bank's OMO intervention in October and November.