The Reserve Bank on Tuesday said it will infuse Rs 100 billion into the financial system by purchasing government securities on Friday as part of liquidity injection measure. This was a response to the banking system liquidity deficit, which hit an estimated Rs 1.4 trillion.
Commenting on this development, Nomura Financial Advisory and Securities, said, ``The main cause of the current liquidity deficit in the banking system is the build up of government balances. A reduction in government spending and disinvestment proceeds are the key factors which led to an increase in government balances to Rs 670 billion on February 1 to an estimated Rs 900 billion-1 trillion. Given the advance tax outflows on March 15, banking system liquidity is expected to worsen further. In addition, we expect currency demand to withdraw another Rs 200 billion from the banking system between now and March. Overall, the banking system liquidity deficit is expected to worsen further in March. In anticipation of this, we expect RBI to conduct two or three more OMOs between now and March. The OMO announcement is positive for bonds. We expect the 10-yr bond to move toward the lower side of the 7.75-95 range by mid-March. This should comfort the bond market, which should also reduce the paid hedging flows in belly of OIS (3yr-5yr tenor).``
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