“With the month end spending, this core will get translated into the banking system which will increase it from three to close to four lakh crore and there is a possibility that it may bring down the overnight rates to close to 5% or below, probably which the central bank is not very comfortable with and would like to push the overnight rates between five-quarter and five-half which is the policy rate,” says Abhishek Bisen, Kotak Mahindra AMC.Reserve Bank of India is now looking at taking liquidity out. For last three months ever since the new governor has come back, the headlines have been liquidity has been pushed back into the system. But this is a different headline from what the classic approach in last one quarter has been. Why is that?
Abhishek Bisen: So, it is slightly confusing for the markets. But let me just try to clarify with some data points to you. If you look at the core liquidity in the banking system, it is close to six lakh crore. But if you look at the laf, it is somewhere around two-and-a-half to three lakh crore. With the month end spending, this core will get translated into the banking system which will increase it from three to close to four lakh crore and there is a possibility that it may bring down the overnight rates to close to 5% or below, probably which the central bank is not very comfortable with and would like to push the overnight rates between five-quarter and five-half which is the policy rate. So, which is why they have come out with this VRRR to fine-tune the liquidity operations and it is not exactly as withdrawing liquidity which is perceived as negative from the overall easy rate cycle, it is just fine-tuning the operation, not withdrawal of liquidity as such.So, once the advanced tax compulsions, they settle down, which they have and this entire year-end compulsion which gets over, which is because it is a mid-year, two quarters coincide on 30th of June, will RBI be prompted to push back liquidity back into the system as demand comes back?
Abhishek Bisen: Yes, so, if you observe, it is a seven-day operation and once they believe it is getting to a tighter zone, they can release it back. So, as I explained it to you, they just do not want the overnight rates to collapse completely. If the repo rate stands at five-half, the SDF is at five-quarter and the overnight rates align towards 5%, it is as good as 50 basis point additional cut, which probably they are trying to resist for now in the current environment. Two-and-a-half, three lakh crore surplus is decent enough for the markets to function.

Now where do you see call money essentially settling then? I mean, will it be slightly still higher than fixed deposits?
Abhishek Bisen: The call money is not likely to be higher than fixed deposit. Call money is likely to be in the band of five-quarter to five-half. Now, the bigger moot question is whether they are aligning it towards exactly five-half or they will be okay with five-quarter which there was traditional when the repo rate was 6% the overnight rates were somewhere around 5.75. So, with the same setting, if repo rate is at five-half and the SDF is five-quarter, if they are comfortable with five-quarter, then it is fine. But if they take it all the way towards five-half, then it will be perceived as tightening operation and it will be counterintuitive. Entire action of 50 basis point cut and the CRR will be completely taken off the table.