Mumbai/New Delhi: The RBI is looking to use the new liquidity adjustment framework to manage liquidity in the system due to the mega LIC initial public offer (IPO). Over the next few weeks, banks could see a surge in deposits from potential subscribers, which would be followed by Rs 65,000-70,000 crore cash going out of the system. Adding to this volatility will be some dollar flows from overseas.
Sources said that last month, the RBI conducted periodic repo operations to tide over the cash crunch caused by high GST payments by businesses. A similar strategy may be deployed during the country’s largest public issue. By all accounts, the sale of 5% shares by the government, which may be at over Rs 2,000 a share, will drain out cash from the system towards the end of the financial year. Mid-March is also the time when money markets face their worst cash crunch as advance tax payments start flowing into the government account.
The government has asked the National Payments Corporation of India to keep the infrastructure ready for managing large volumes for subscriptions and processing refunds. The use of the Unified Payments Interface (UPI) platform would result in money moving very fast in and out of bank deposits. The fortnight ended November 5, 2021, saw bank deposits surge by Rs 3.3 lakh crore, only to fall by Rs 2.7 lakh crore in the subsequent fortnight. According to bankers, this could have been triggered by the spate of large IPOs during the period including Paytm. The LIC IPO is expected to be four times that of Paytm’s Rs 18,300 crore offering.
Given the scale of the IPO, the government and the bankers for the issue have also reached out to international investors, some of whom are looking to pump in money, which will also result in foreign exchange inflows into the Indian market. A sudden impact on currency movement is something that the RBI is also wary of. An intervention by the RBI, through the purchase of dollars, would result in more rupees being released into banks.
According to a bond dealer, there is over Rs 6 lakh crore of surplus liquidity. This gives the central bank the flexibility to ensure that the market is always in surplus mode and that rates do not reach the repo level — the rate at which banks borrow from the RBI.
Asked about the issue at a time when there is uncertainty in the markets, FM Nirmala Sitharaman said that the IPO has created a lot of buzz and positivity. “A big decision like this is never a knee-jerk reaction. It is done with consciousness… And I can see after the announcement, the reception, there is a buzz in the air,” Sitharaman told reporters.
