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Systemic liquidity shifts and market impacts in India: May 2024 overview


Tight liquidity conditions are likely to persist until July 2024 before government spending picks up. The 10-year yield is anticipated to trade within the 6.80% to 7.15% range in H1 FY2025, with possible hardening towards the upper end based on the timing of rate cuts by major central banks.

An overview of the major points is as below:

Liquidity deficit emerges amid rising government cash balances

After experiencing a surplus from April 1-19, 2024, systemic liquidity in India shifted to a deficit from April 20 to May 24, 2024. This change was driven by an increase in the Government of India’s (GoI) cash balances, which rose from Rs. 1.1 trillion on April 5, 2024, to Rs. 1.5 trillion by April 19, 2024, and further to Rs. 2.4 trillion by May 3, 2024. This buildup in cash was largely due to slower government spending during the Model Code of Conduct and Parliamentary Elections, coupled with robust GST inflows.

Government adjusts treasury bill issuances and G-Sec buybacks

The GoI’s substantial cash position has prompted two significant actions: a reduction in planned gross Treasury bill issuances for Q1 FY2025 by Rs. 600 billion, and the announcement of three rounds of G-sec buybacks worth Rs. 1.6 trillion. However, the total amount accepted across the three auctions in May 2024 was only Rs. 178.5 billion, a mere 11.2% of the notified amount.

Record RBI dividend boosts government cash balances

On May 22, 2024, the Reserve Bank of India (RBI) declared a record dividend payout of Rs. 2.11 trillion to the GoI for FY2025, significantly higher than the Rs. 0.9 trillion in FY2024. This payout exceeds the budgeted Rs. 1.5 trillion for aggregate dividends and profits for FY2025, including Rs. 0.5 trillion from PSUs. This windfall is expected to elevate GoI cash balances in the short term until government spending resumes.

Future liquidity and fiscal projections

Given the sizable RBI dividend and anticipated quarter-end tax inflows, combined with expectations of continued sluggish government spending until the full budget in July 2024, the GoI’s cash balances are likely to remain high. Consequently, systemic liquidity is expected to stay tight over the next two months, prompting the RBI to continue conducting variable rate repos (VRRs).

The unexpected large RBI dividend provides the GoI with approximately Rs. 1.0 trillion of additional flexibility for enhanced expenditures or sharper fiscal consolidation than initially outlined in the Interim Budget for FY2025. This could potentially lead to lower G-sec issuances in H2 FY2025, positively affecting bond yields.

Bond market outlook

The 10-year G-sec yield has decreased by 8 basis points in FY2025 to date (up to May 27, 2024). ICRA predicts further easing of the yield leading up to the inclusion of Indian Government Bonds (IGBs) in the J.P. Morgan Government Bond Index, alongside the potential for reduced market borrowings for FY2025. The yield is expected to fluctuate between 6.80% and 7.15% in the remainder of H1 FY2025, potentially reaching the upper limit if expectations for rate cuts by the US Fed and MPC are deferred beyond Q3 FY2025.


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