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First Line of Action by RBI


Bansi Madhavani, Analyst, India Ratings and Research Pvt Ltd & Soumyajit Niyogi, Associate Director have learned that the Reserve Bank of India’s (RBI) first line of action against the uncertainties arising post Brexit will be to address temporary shocks in systemic liquidity through liquidity channels rather than policy rates.

RBI has tools to intervene in multiple ways (1) stepping up the size of open market operations (2) reducing the daily requirement of cash reserve ratio (3) broadening the collateral base in the repo (4) increasing the size and duration of discretionary term repos.

Markets May Enter in a Phase of High Volatility:

As investors continue to internalise the impact of Brexit, both debt and currency markets are likely to enter in a phase of high volatility, says Ind-Ra. In the course of week, investors will focus on market developments as the UK moves to formally exit the European Union (EU) and key officials both from US Fed, Bank of England and European Central Bank hold talks. The rupee is likely to trade in the range of 67.60/USD-68.40/USD this week while the 10-year G-sec yield trading range is likely to be 7.41%-7.51%.

Fresh Interest In Bonds:

For the bond market, the agency believes the impact of Brexit will be moderately positive on account of four factors (1) global central banks especially US Fed will have to keep the monetary conditions at ease in the foreseeable future (2) crude oil price will likely stay under pressure amid the renewed uncertainties of global recovery (3) in case of tepid foreign flows, RBI will have to step up its purchase of G-sec through open market operations to ensure reserve money growth - thus collaterally benefiting the demand dynamics (4) low global bond yields will make Indian bonds more attractive for the existing investors.

Global Risk Environment to be Key Driver of Rupee:

An immediate sentiment of risk aversion following the global turmoil is likely to keep the rupee on the defensive amid heightened volatility; however, stronger macro fundamentals may cushion the impact in relation to peers. The impact of Brexit on the US dollar will be counterbalanced with narrowing possibilities of a rate hike by the US Fed in the near term and ‘flight to safety’ to USD denominated assets. More central banks may now be inclined to stay in and widen their accommodative stance while the US Fed may reassess its rate normalisation trajectory. This is likely to support the emerging markets, once the initial panic subsides.