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Strange Things are Happening in the Liquidity Bazaar


In the days following the RBI hike in rates, we are seeing interesting movements in the fixed income markets.

Repo Bids Rise Substantially, But No MSF

Repo is what banks borrow overnight from RBI at 7.25%. MSF is the same thing, at 10.25%. Ever since the repo limit was introduced at 75,000 cr. (Previously: no limit) Repo bids have gone up like crazy, but only 75,000 cr. was allocated. However, the higher bids don’t mean that banks are desperate for funds – there was little or no borrowing in the MSF window for these days.

Date Repo Bids (Cr.) Repo Given MSF
16-Jul                   2,16,350               2,16,350 5
17-Jul                   1,41,970                   75,000 0
18-Jul                       97,265                   75,000 0
19-Jul                       56,860                   56,860 ?

Note that the restrictions on Repo were from 17 July.

From Game Theory, banks will attempt to bid more (since the repo allocation is pro-rata to the bid size every day), but even that impact has subsided with 19 July seeing less than the 75K cr. bid.

T-Bill auctions rejected

RBI conducts weekly auctions of about Rs. 12,000 for Treasury bills. This week, on wednesday, all bids were rejected for the two auctions scheduled, the 91-day and the 182-day T-Bills.

At the time of auction on Wednesday, T-Bill yields were about 9% to 9.5% in the market. If all bids were rejected, RBI really didn’t want to show that it was okay with these rates.

Rates in the market are now down to 8.50% for T-Bills.

OMO Sale Fails To Go Through

The RBI also intended to remove 12,000 cr. of money from the system by selling securities in an OMO auction. (How this works: RBI Sells Securities it has on its books. Banks pay money. That money goes out of circulation since it’s now with the RBI. So money supply actually reduces.)

The auction saw only 2,500 cr. of sales by RBI, and those too of the 2026 and 2030 bonds. None of the bids in the 2017 and 2022 were accepted.

I think that’s because the 2022 bond (8.13% today) is trading too close to the 2026 bond in terms of yields, and the 2017 bond (8.26% today) is trading EVEN higher. The RBI lives in a world where it believes inverted yield curves are not acceptable, I guess; so they rejected bids for the shorter term bonds. Just my opinion.

Post the OMO auction failure, yields fell substantially. The 2023 bond went down below 8%.

Mutual Fund Special Repo Sees No Desire

There was a special repo to meet redemption needs of mutual funds, where MFs would make a request to banks, who could borrow in a special 10.25% rate auction. Although some funds have reportedly borrowed from banks, these banks have chosen to not participate in the auction at all. and there was ZERO borrowing.

This could be a violation of rules where an MF request HAS to be run through the special repo window. But banks are flush with cash; they probably decided to lend it from their own surplus and face the consequences.

(Note: There aren’t any consequences to banks, or to anyone doing any sort of illegal activity, I know. Please stop laughing.)

The Impact

You might complain about the RBI move, that it was premature, that it was not required, that it will stymie growth, it will hurt liquid funds and credit growth etc.

Yet, it’s apparent that the move hasn’t yet hurt liquidity in any serious manner and after a few days, the markets seem to have taken it in stride. Sure, interest rates are higher – yields are up about 1% to 2% on everything – but that’s bound to be the case when the goal of the RBI is to cut liquidity (money does become more expensive).

Are these measures short-term? Some bankers would like to think so. The challenge will be evident when the September crunch arrives as corporates head to pay taxes and take money out of the system.

The Rupee is at 59.79 and while it has come off from the Rs. 60 highs, it is still under pressure.

FIIs have continued to sell debt, with over $240 million worth of rupee debt being sold in the last three days (full July: $1.9 billion). 

Growth will (and should) be hit; the stability in inflation provided by liquidity measures will take at least six months t
o a year to come through. A lot will happen by then, so it’s way too early to call.


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