LIC IPO: RBI gears up to tackle cash crunch

MUMBAI/NEW DELHI: The RBI is wanting to make use of the brand new liquidity adjustment framework to handle liquidity within the system as a result of mega LIC preliminary public supply (IPO). Over the subsequent few weeks, banks may see a surge in deposits from potential subscribers, which might be adopted by Rs 65,000-70,000 crore money going out of the system. Including to this volatility will probably be some greenback flows from abroad.
Sources stated that final month, the RBI performed periodic repo operations to tide over the money crunch brought on by excessive GST funds by companies. The same technique could also be deployed in the course of the nation’s largest public situation. By all accounts, the sale of 5% shares by the federal government, which can be at over Rs 2,000 a share, will drain out money from the system in direction of the tip of the monetary 12 months. Mid-March can also be the time when cash markets face their worst money crunch as advance tax funds begin flowing into the federal government account.

The federal government has requested the Nationwide Funds Company of India to maintain the infrastructure prepared for managing giant volumes for subscriptions and processing refunds. Using the Unified Funds Interface (UPI) platform would lead to cash transferring very quick out and in of financial institution deposits. The fortnight ended November 5, 2021, noticed financial institution deposits surge by Rs 3.3 lakh crore, solely to fall by Rs 2.7 lakh crore within the subsequent fortnight. In keeping with bankers, this might have been triggered by the spate of enormous IPOs in the course of the interval together with Paytm. The LIC IPO is anticipated to be 4 occasions that of Paytm’s Rs 18,300 crore providing.
Given the dimensions of the IPO, the federal government and the bankers for the difficulty have additionally reached out to worldwide traders, a few of whom wish to pump in cash, which will even lead to international alternate inflows into the Indian market. A sudden influence on forex motion is one thing that the RBI can also be cautious of. An intervention by the RBI, via the acquisition of {dollars}, would lead to extra rupees being launched into banks.
In keeping with a bond seller, there may be over Rs 6 lakh crore of surplus liquidity. This offers the central financial institution the pliability to make sure that the market is all the time in surplus mode and that charges don’t attain the repo degree — the speed at which banks borrow from the RBI.
Requested in regards to the situation at a time when there may be uncertainty within the markets, FM Nirmala Sitharaman stated that the IPO has created plenty of buzz and positivity. “An enormous resolution like that is by no means a knee-jerk response. It’s completed with consciousness… And I can see after the announcement, the reception, there’s a buzz within the air,” Sitharaman advised reporters.