The RBI’s latest measures worth Rs 1.5 lakh crore should ease out the stress in the money markets and the start of bond purchases should also drive rupee rates lower through signalling and expectation channel as RBI will not want to tighten liquidity and may need to do more OMO purchases, said brokerages on Tuesday.
According to HSBC, now focus will be on Union Budget on Feb 1 and more importantly the RBI monetary policy committee (MPC) meeting on Feb 7 with higher chances of rate cut (HSBC Economics is expecting 25 bps cut in policy rate).
"We expect OMO auctions to purchase government bonds to lead to a compression of term premiums and we maintain our buy on 10-year government securities," it said.
The central bank will conduct three OMO purchase auctions of government bonds for an aggregate amount of Rs 60,000 crore. Three OMO auctions (Rs 20,000 crore each) will be held on Jan 30, Feb 13 and Feb 20.
Second, a six-month FX swap (USD/INR buy/sell swap) auction of $5 billion will be held on Jan 31. This will be equivalent to about Rs 43,000 crore of rupee liquidity. Third, a long-dated variable rate repo auction (56-day) of Rs 50,000 crore will be held on Feb 7.
A 56-day tenure will cover banks’ liquidity requirements till end-March. According to Emkay Global Financial Services, a turn in the liquidity cycle is a big positive for domestic equities and BFSI is the best way to play this in the short term.
"This is coupled with other positives -- earnings forecasts have held up through January 2025 and valuations are now more reasonable. This may not be the absolute low for the markets, but we think it is a good time to start nibbling into stocks where valuations are now reasonable," said Emkay Global.
Additional liquidity measures and rate cut in Feb will have more impact, said brokerages.
"We believe, however, that this needs to be coupled with the easing of lending curbs imposed on banks and NBFCs since late 2023, especially on unsecured loans. This would bring back momentum to retail lending, and inspire a consumption bounce back in the second half of CY25. Given that the space for fiscal stimulus is low, this should be an important countercyclical imperative," Emkay Global.
