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Charts & Analysis

RBI Sets Up Term Repo for 50,000 cr. on Friday, But No Real Liquidity Being Added


RBI will do a term repo for Rs. 50,000 crore on Friday, March 14.

Remember that March 15 is the due date for income tax advance payments when companies have to pay all of their taxes. The money will go into the government account with the RBI which can’t be lent out further, so it is a contraction of the money supply until the government spends the money. To offset that, the RBI provides liquidity.

The good thing is that the liquidity being provided is temporary (21 days only) but it has been providing a LOT of excess money on a temporary basis.


Repo is overnight liquidity at 8%, which is now a small 30,000 cr.

Term repo is money which banks bid for, and return after a fixed term. Currently there are three term repos:

  • 39,000 cr.  in 14 day repo, matures 21 March (8.19%)
  • 20,000 cr. in 28 day repo, matures 14 March (8.60%)
  • 30,000 cr. in 28 day repo, matures 18 March (8.22%)

The total term repo in the system is 89,000 cr.

The new auction on Friday 14 March will offset both the repos maturing on 14th and 18th March, but add no extra liquidity. However, between 14 and 18 march, banks will have access to the excess 30,000 cr. which fits in very well with the RBI strategy of providing only temporary liquidity.

This is interesting for two reasons:

  • No “permanent” liquidity like OMOs (Open Market Operations) is being provided.
  • No extra money is being added – 50,000 cr.matures, and another 50,000 cr. is being added.

There are no OMOs being announced. There is going to be a liquidity issue with the tax deadline, and we aren’t adding extra money. With the USDINR going from Rs. 62 to under Rs. 61 in March, it may be that RBI took advantage and bought dollars? (RBI buys dollars by printing rupees to pay for them, adding liquidity to the system)

Primer note: Usually RBI is paranoid about liquidity. They want banks to have money, and to have them at rates close to the repo rate. If there is a shortage of money, they will do things like term repos to ease the situation. This is temporary liquidity – banks get some money but have to return it after some time.

The RBI can provide permanent liquidity by buying bonds from Banks. These are called OMO auctions, and the money that comes in doesn’t have to be returned to the RBI by the banks (of course the government will pay when the bond matures, but that’s long term). Permanent liquidity is more preferred when the liquidity situation has a more permanent impact, like for instance when the RBI has sold US dollars to prop up the rupee (it did so in Jan).

Sometimes permanent liquidity will be added when the central bank buys dollars. The RBI can sell dollars whenever it wants. It doesn’t have to tell us till much after the fact. This is different from OMOs in that the RBI has to preannounce OMOs.

So while we know when RBI is manipulating the money supply through OMOs, we don’t know when it does it by buying or selling dollars. This is horrible for transparency, and RBI won’t change it because it actively manipulates the Rupee-Dollar rate whenever it likes, so it won’t tell us before it buys or sells. This, in my opinion, is not the right thing. If RBI wants to play, it should play and not regulate that market or print our beloved rupees at its whim and facy.

We should cut up the RBI and one of the segments should be allowed to borrow money in auctions to play in the forex market, but the consequences to money supply should be known well in advance.


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