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With banks’ borrowing from the Marginal Standing Facility (MSF) window of the Reserve Bank of India (RBI) falling sharply, there are early signs that short-term rates are moving towards the repo rate.
Under the MSF, all banks can borrow overnight from the central bank up to one per cent of their net demand and time liabilities (NDTL), on all working days. Repo is the rate at which RBI lends to banks for the short term.
In mid-July, RBI had raised the MSF rate by 200 bps to 10.25 per cent (it had previously been kept 100 bps higher than repo) and capped banks’ borrowing from the Liquidity Adjustment Facility (LAF). This was done to tighten liquidity, to curb speculation in the exchange rate market. Short-term rates had, as a result, surged and stayed at the double-digit mark. MSF became the operational rate for banks.
After the central bank introduced the term repo window to infuse more liquidity in mid-October, MSF borrowing fell to around Rs 10,000 crore a day in the last week of October, from a high of more than Rs 1 lakh crore in mid-September.
“We are moving in the direction of the repo being the operative rate but are still far from it. In Friday’s term repo-LAF, the cutoff was 8.3 per cent, between the repo and MSF rates. Liquidity is available to bankers but is cheaper than the MSF rate. To that extent, there is an easing in terms of rates but we are still far away from repo being the operational rate. It will be the operational rate if liquidity (demand) in the system is reduced to below Rs 50,000 crore (a day) or if money available from the LAF is increased from 0.5 per cent of NDTL (the present RBI cap) to one per cent,” said Prasanna Patankar, senior vice-president at STCI Primary Dealership.
Call money rates, which had breached double-digits after RBI’s liquidity tightening in mid-July, have dropped significantly. The weighted average call money rate was 8.7 per cent on Tuesday, compared to Friday’s 8.62 per cent.
“The infusion of liquidity through RBI's buy/sell swap window has reduced borrowing from the MSF counter. If the quantum of refinance is increased gradually at the overnight and 7-14 days repo, the overnight rate would settle at 8-8.25 per cent driving the three to 12-month money market rate curve into 8.5-9.25 per cent, which is too good for borrowers when inflation continues to stay at elevated levels,” said Moses Harding, group chief executive, liability and treasury management, SREI Group.
CP issuance boostUnder the MSF, all banks can borrow overnight from the central bank up to one per cent of their net demand and time liabilities (NDTL), on all working days. Repo is the rate at which RBI lends to banks for the short term.
In mid-July, RBI had raised the MSF rate by 200 bps to 10.25 per cent (it had previously been kept 100 bps higher than repo) and capped banks’ borrowing from the Liquidity Adjustment Facility (LAF). This was done to tighten liquidity, to curb speculation in the exchange rate market. Short-term rates had, as a result, surged and stayed at the double-digit mark. MSF became the operational rate for banks.
After the central bank introduced the term repo window to infuse more liquidity in mid-October, MSF borrowing fell to around Rs 10,000 crore a day in the last week of October, from a high of more than Rs 1 lakh crore in mid-September.
“We are moving in the direction of the repo being the operative rate but are still far from it. In Friday’s term repo-LAF, the cutoff was 8.3 per cent, between the repo and MSF rates. Liquidity is available to bankers but is cheaper than the MSF rate. To that extent, there is an easing in terms of rates but we are still far away from repo being the operational rate. It will be the operational rate if liquidity (demand) in the system is reduced to below Rs 50,000 crore (a day) or if money available from the LAF is increased from 0.5 per cent of NDTL (the present RBI cap) to one per cent,” said Prasanna Patankar, senior vice-president at STCI Primary Dealership.
Call money rates, which had breached double-digits after RBI’s liquidity tightening in mid-July, have dropped significantly. The weighted average call money rate was 8.7 per cent on Tuesday, compared to Friday’s 8.62 per cent.
“The infusion of liquidity through RBI's buy/sell swap window has reduced borrowing from the MSF counter. If the quantum of refinance is increased gradually at the overnight and 7-14 days repo, the overnight rate would settle at 8-8.25 per cent driving the three to 12-month money market rate curve into 8.5-9.25 per cent, which is too good for borrowers when inflation continues to stay at elevated levels,” said Moses Harding, group chief executive, liability and treasury management, SREI Group.
Issuance of commercial paper (CP) is also set to get a boost with this easing of system liquidity. Issue arrangers say CP coupon rates dropped by about 20 basis points since RBI’s second quarter review of monetary policy on October 29.
CP is a debt instrument, with tenure less than a year, issued by companies to finance working capital requirements such as inventories and payroll. On Tuesday, Indian Oil Corporation raised 1.5 month CP at a coupon rate of 8.55 per cent.
“Yes, CP issuance will pick up. Government spending has happened in the first week of this month, due to which liquidity in the system has eased and overnight rates have dropped. But we need to see if this easy liquidity will be sustained,” said Ramanathan K, executive director and chief investment officer, ING Mutual Fund. “When the repo rate becomes the operational rate, we can see CP rates softening further by about 25 bps. The system might move towards repo becoming the operational rate within a month's time, unless RBI decides to keep liquidity tight,” said R Sivakumar, head of fixed income and products, Axis MF.
“There is a whole lot of liquidity that the RBI is providing now. What we would like to see is the operational rate come down to the LAF rate and at that point, we will take a call on how much liquidity we feel comfortable with in the system,” said Raghuram Rajan, governor of RBI, last week.
