Markets anticipate further easing from the Reserve Bank of India. Twelve-year bond prices are climbing, apparently on speculation that the central bank will intervene to buy the securities to ease the cash crunch facing banks. Bloomberg reports:

The yield on the most-traded 2022 note fell after the Reserve Bank of India last week bought bonds through an open- market auction for the first time since September 2009. The central bank on Nov. 4 bought back 83.5 billion rupees ($1.9 billion) of debt, after offering to purchase as much as 120 billion rupees. Read more

Temporary measures designed to ease a cash crunch in the banking sector over the weekend have been extended to run till Thursday. Additional liquidity will be provided to banks through an extra daily auction, since the Bank’s “liquidity adjustment facility window … has been in … deficit … recent[ly]“. Extra auctions were initially set for October 29, 30 and November 1. Now, auctions will also take place on November 2, 3 and 4.

Banks can also avail themselves of a temporary reduction in the statutory liquidity ratio: they will be allowed to hold 24 per cent rather than 25 per cent with the central bank. By one estimate, this small reduction is equivalent to an additional $10bn liquidity. Read more

Rates have been held today by Poland’s central bank, but some additional liquidity will be drained from the system by the decision to increase the amount of capital banks have to keep with the central bank. The reserve ratio will be increased from 3 to 3.5 per cent, the bank said, via Google translate.

No further information was given as the press conference hasn’t happened yet.

China has temporarily increased the reserve ratio required from six large commercial banks banks. For two months, the banks will need to keep 17.5 per cent of depositors’ balances on hand, instead of 17 per cent. With banks hoarding more cash, money supply and credit availability will fall in China. In two months’ time, the reserve ratio is expected to return to 17 per cent.

The surprise move, reported by Reuters from four unnamed sources, may be a response to rising capital flows, rather than a prelude to monetary tightening. It could also be intended as a warning to banks rumoured to have stepped up their lending in September, above government targets. Read more

Ralph Atkins

The International Monetary Fund is already the world economy’s fire fighting team (as well as police force). Does it need even more powerful tools to do its job?

Not according to Germany’s Bundesbank. It has today signalled strong opposition to the idea of a “global stabilisation mechanism” (GSM) that would allow the IMF to offer unlimited credit without conditions to several countries at once.

The idea of equipping the IMF to prevent an economic crisis on one country spreading to others, has been floated by South Korea, and has apparently been received sympathetically in France and the UK. But ahead of this weekend’s IMF meetings in Washington, the Bundesbank is warning that the plan could have the opposite of the desired effect.  Read more

Ralph Atkins

As eurozone leaders cheered Ireland’s attempts to bring its crisis under control, banks across the 16-country region provided a separate display of reviving financial market confidence. The European Central Bank reported it had rolled over much less than expected of €225bn in three-to-12 month loans to banks that expired on Thursday.

The news was a boost for the ECB, marking a significantly reduced reliance on the unlimited liquidity it has been pumping into the banking system since the collapse two years ago of Lehman Brothers investment bank. Read more

Ralph Atkins

The health of eurozone banks faces a fresh test this week when they are due to roll over €225bn in loans, the largest amount at the ECB since early July, when €442bn of one-year loans matured.

The return of liquidity could put upward pressure on market interest rates, while the volumes that are converted into new loans will be an important guide to levels of financial market confidence within Europe’s monetary union. The results could help determine the pace at which the ECB pursues its “exit strategy” to unwind exceptional measures. Read more

Ralph Atkins

Jean-Claude Trichet, European Central Bank president, said yesterday’s decisions on future liquidity operations had been reached by “consensus”. To some ears, that might sound like there was a big split. In an Anglo-Saxon context, a consensus might be seen as simply “more than half”.

I think that is wrong. When Mr Trichet talks about a decision being made by “consensus,” my understanding is that that means there was some initial resistance but in the end everyone was able to support the final decision. It is a notch or two weaker than a decision agreed “unanimously”. Read more

Ralph Atkins

August’s news lull has just been rudely broken by an extraordinary interview Axel Weber, Bundesbank president, gave to Bloomberg Television. In it, Mr Weber set out what he thought should happen in the next few months with the ECB’s liquidity operations – something that was only supposed to be discussed behind closed doors ahead of the ECB meeting on September 2. For good measure, Mr Weber dismissed the ECB’s controversial bond purchasing programme, which he opposed, as having had “a minor role only”.

I suspect all this will not go down well at all with other ECB governing council members. Hitherto, Jean-Claude Trichet, ECB president, has generally kept everyone in line, and announced the big decisions himself. If Mr Weber is allowed to speak out publicly, why not everyone else? The lack of verbal discipline is all the more telling as Mr Weber is a possible candidate to succeed Mr Trichet next year.

Will it help or hinder Mr Weber’s chances? Read more

Central banks in the east Asia Pacific region are planning closer co-operation managing their liquidity requirements, as each bank’s ability to provide liquidity “may be limited”. Some banks lack confidence that their liquidity management procedures could cope with renewed stress in the money markets. This from a study presented at last week’s EMEAP meeting, which ended on Friday.

That some of the 11 central banks lack confidence in their liquidity management is implied in the study’s executive summary: Read more