RBI’s recent measures to ease liquidity (7-Oct-13)..

RBI further eased liquidity measures today evening. It lowered the MSF by 50 bps to 9% (spread between Repo and MSF is 150 bps now) and announced another fancy instrument – term repo for liquidity easing:

Starting with the Mid-Quarter Review of September 2013, the Reserve Bank of India (RBI) began a calibrated withdrawal of exceptional measures undertaken since July 2013. This was done with a view to normalising liquidity conditions. Accordingly, the marginal standing facility (MSF) rate was reduced by 75 basis points from 10.25 per cent to 9.5 per cent. Furthermore, open market purchase operations of Rs. 9,974 crore were conducted today to inject liquidity into the system. On a review of evolving liquidity conditions and in continuation of this calibrated unwinding, it has been decided to:

  1. Reduce the marginal standing facility (MSF) rate by a further 50 basis points from 9.5 per cent to 9.0 per cent with immediate effect.

  2. Provide additional liquidity through term repos of 7-day and 14-day tenor for a notified amount equivalent to 0.25 per cent of net demand and time liabilities (NDTL) of the banking system through variable rate auctions on every Friday beginning October 11, 2013. The notified amount and tenor of the term repo auctions will be announced prior to the dates of the auctions.

Detailed guidelines regarding term repos are being issued separately.

I have explained MSF thing in detail in previous post.

How about this term repo thing?

  • Well it is nothing but Repo for days longer than overnight funding purposes. Now, we will have these repo lending for 7-14 days.
  • RBI lends funds in Repo at a fixed rate but now these funds will be sold at variable rates. So there will be auctions for these funds.
  • NDTL is currently at Rs 76 lakh Cr (76,000 bn), therefore available liquidity (.25% of NDTL to be auctioned) would be around 19,000-20,000 Cr. This will be like Term Auction Facility launched by Fed to infuse funds in the market. The funds infused via this route will be larger than OMOs which absorb around 10,000-12,000 cr depending on the auction size.

The markets have proposed launching of term repo as an additional tool of liquidity. It just helps balance the books for 7-14 days. Overnight is too short and OMOs is timeless. So this comes as a mid-term measure…

However, the confusion over several liquidity and monetary measures continues. We need fewer liquidity tools and not plenty of them. The several tools creates this confusion amidst markets over what next and what tools to use. It also creates this feeling of crisis.

So, for instance RBI could have eased the Cap on Repo borrowing which stands at 0.5% of NDTL. But it is not sure about how the crisis is panning out. So it does not ease the cap which would have infused funds right away but still decides to infuse funds every Friday via term Repo. So you do a bit of both –

  • Maintain the cap on Repo funds to keep liquidity tight but ease liquidity by issuing Term Repos..
  • Ease the MSF to ease liquidity but hike the Repo. Some may argue that this spread between the two was 100 bps which was hiked to 300 bps to tighten liquidity in July. This has now been eased to 200 in Mid-Q review and now to 150 bps. So RBI is going back to 100 bps and it is fine. Well that is right but when you increase the Repo you indicate clearly that you want the liquidity to be tight. What else does Repo tighten indicate? It simply says that RBI would now lend funds at a higher rate which automatically implies tighter liquidity …after all this excess liquidity is what leads to inflation…

Getting all muddled up. Or perhaps I am too confused and RBI knows what it is doing…

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