RBI has announced weekly auctions of Cash Management Bills (CMBs) for Rs 22,000 crores. The auction will be held every Monday starting 12th August 2013. The duration of the CMBs will be announced one day prior to the auction i.e. on Fridays.
The CMB auctions are conducted to suck out liquidity from the system and push up overnight money market rates to over 10.25% levels. RBI is intent on making liquidity expensive in the system to prevent speculation in the Indian Rupee (INR) that touched record lows of Rs 61.80 this week.
The CMB auctions are over and above the restrictions of banks access to repo funding in the LAF (Liquidity Adjustment Facility) where banks can only borrow upto 0.5% of their NDTL. Banks require to access the MSF (Marginal Standing Facility) at 10.25% for funds over and above 0.5% of NDTL.
The CMBs are usually issued to plug the overdraft of the government with the RBI. The governments WMA (Ways and Means Advances) limit for the first half of this fiscal is Rs 30,000 crores. The government drawing down 75% of the WMA limit triggers CMB issuance or issuance of dated bonds.
Issue of Rs 22,000 crores of CMB every week is a measure to strangle system liquidity. The government will not be spending Rs 88,000 crores in a four week period. The RBI is paying dividend of Rs 33,0000 crores to the government and second quarter advance tax is due in mid September. Government finances are unlikely to be poor in the next one month.
The bond market will react negatively to the CMB auction as it is a sign that the RBI is keen on plugging INR volatility by using its tools. Short end of the yield curve will rise much faster than long end of the yield curve leading to steepening of the yield curve.
