1. Liquidity in the first half of the July was favourable mainly on the back of
government spending and falling wedge between credit and deposit growth.
Central government was seen overspending utilising their WMA limits. From
June to Mid-July difference between deposit and credit growth was seen at
~940bn.
A sharp rise in borrowing via LAF window was seen a day before RBI’s
liquidity measures comes into play.
Asset managers were cash heavy then to fund the banks day to day
requirement keeping the overnight rates in check. However post RBI’s
another round of measure which tightened the liquidity substantially
overnight rates shot up to, a new policy rate, Marginal Standing Facility.
Currency in circulation was seen pretty stagnant. On the back of seasonal
factors, currency in circulation falls at the end of first and full of second
quarter.
Liquidity : Recent Past
-600
-400
-200
0
200
400
600
800
1000
10%
11%
12%
13%
14%
15%
16%
17%
DG - CG in bn (RHS) Deposit Growth Credit Growth
-2200
-1700
-1200
-700
-200
300
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
LAF Net Borrowing in BN. (RHS) India Call Rates
CBLO RBI REPO
Week Ended Cent. Bal (bn) State WMA Cent. WMA
Jul 19, 2013 1 3.73 208.91
Jul 12, 2013 1 4.44 97.81
Jul 5, 2013 1 2.71 409.42
Jun 28, 2013 1 12.45 15.72
Jun 21, 2013 1 5.51 -
Jun 14, 2013 1 24.49 119.43
Jun 7, 2013 1 5.62 -
May 31, 2013 1 3.65 -
May 24, 2013 1 4.22 -
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2. Rupee, post Fed’s intention of tapering bond buying earlier than
expected, depreciated by ~9.5%. Meanwhile it touched an all time
low of 61.17.
Volatility in currency markets increased. FIIs started pulling funds not
only from debt markets but from equity as well. Banks and large
domestic players were seen speculating on the currency as the cost of
fund was low enough to provide good arbitrage opportunity.
Thereafter RBI announced two set of measures. First on 16th when it
raised MSF by 200bps, capped LAF borrowing at 1% of total NDTL and
an OMO of 120bn. Second on 23rd when it reduced LAF limit to 0.5%
of individual NDTL and tweaked CRR requirement norms.
Falling incremental credit to deposit ratio is expected to add liquidity
into the system going ahead. RBI will be releasing dividend to
government which if released immediately via spending may help
liquidity ease further.
Liquidity : Recent Measures & Outlook
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
IN 3M CD (in %) IN 1Y CD (in %)
liquidity ease further.
Source : RBISource : RBI
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3. Short term rates in July rose substantially following RBI’s measure to
tighten liquidity in a bid to curb currency volatility.
Liquidity is mainly guided by factors like currency in circulation, difference
between deposit and credit growth and government spending.
Credit growth is expected to falter for the near future on the back of
economic uncertainty and fall in aggregate demand. Incremental credit
to deposit ratio is expected to follow a receding bias. Also to note, few
banks have raised short term interest rates. Few are believed to be
contemplating.
Currency in circulation is expected to reduce adding liquidity into the
system. Currency in circulation in June-Aug 2012 added ~166bn into the
system and in June – 19th July 2013 it supported liquidity by ~96bn.
Government is expected to receive substantial amount from the central
bank as dividend by second week of August. Since the dividend amount
Liquidity : Recent Measures & Outlook
Cash Inflows in Crs.
Date Instrument Payment Amount
1-Aug Tbills Redemption 11861
1-Aug SDLs Interest 104
2-Aug Gsec&SDLs Interest 8838
3-Aug SDLs Interest 244
5-Aug SDLs Interest 489
6-Aug SDLs Interest 520
7-Aug Gsec Interest 685
8-Aug SDLs Interest 687
8-Aug Tbills Redemption 25525
10-Aug Gsec&SDLs Interest 3127
12-Aug Gsec Interest 336
14-Aug SDLs Interest 1288
14-Aug T-bills Redemption 10531
bank as dividend by second week of August. Since the dividend amount
forms a part of non-monetary liabilities of RBI, it has no effect when the
same is transferred into government’s account. However liquidity will get
impacted if at all government continues to spend on a continuous basis.
Money market inflows and outflows on the right deciphers liquidity will be
on the easing bias given heavy inflow is expected into the system in next
couple of weeks.
Government, post 10th August is expected may turn more comfortable in
rejecting bids given cash balance will improve on the back of RBIs fund
transfer.
Overall liquidity, for now, seems will remain stable with an easing bias
given all major factors are on the supporting side. However continuous
volatility in the currency may compel RBI to suck liquidity either via a CRR
hike or an OMO.
14-Aug T-bills Redemption
16-Aug Gsec&SDLs Interest 8391
17-Aug SDLs Interest 2573
Total 75199
Cash Outflow in Crs.
Date Instrument Amount
1-Aug 7D CMB 3000
2-Aug G-sec Auction 15000
7-Aug T-bills Auction 12000
9-Aug G-sec Auction 15000
14-Aug T-bills Auction 12000
16-Aug G-sec Auction 16000
Total 73000
State may sell ~100bn on 13th Aug
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