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Reverse Repo at a high

A look at the reverse repo growth over the last few months is interesting:

The reverse repo level crossed 100K cr. every day in April – a typical spike time when new deposits are gathered. But it’s been staying up and the one month average is at an all time high.

Reverse repo is the money parked by banks with RBI, and yields 3.25%, even lesser than the standard savings account interest (3.5%). That means banks are choosing to lend to RBI at lower than they have to pay savings bank holders for the money. Is this typical?

What is interesting is that the last two spikes have come in pretty tough times – July 07 (Subprime crisis) and May 06 (market crash). Typically this means banks are reluctant to lend outside and prefer to keep money with the RBI for the shortest term possible. Business Standard says that new deposits have added 133K cr. to the banking system, but credit has contracted by 38 K crore. Which obviously means banks are reluctant to lend.

But why? I thought our economy is recovering and going back to a 10% growth rate or whatever. Someone forgot to tell the banks?

  • Anonymous says:

    >Banks r not lending in US too. They r trying to save the balance sheet. There is not much demand either as rules r strict. If people worry about jobs they r not going to add more debt. Businesses r in cost cutting mode everywhere.
    I would like you to continue to give data on Indian economy.Thank you.

  • Anonymous says:

    >Can you please share your views on the impact of "free-float" of NSE?

  • Anonymous says:

    >Pardon me for saying this, but your reasoning only displays ignorance on the dynamics of the money markets, and the forces that determine liquidity surpluses and deficits.

    You seem to imply that – had the banks lent out the money, the liquidity in the system would magically reduce. It's not that simple you see. When a bank lends, it transfers money from its domain to the domain of the borrower's banker and on an aggregate (macro level) liquidity does not change. It just moves from one hand to another. Unless, of course the money is sent out of the country (say for import payments) or is impounded (either permanently or for a long period) by the government / monetary authority in some way.

    It requires a continuous process of lending and relending (by the recipient bank) for the liquidity surpluses to get reallocated and smoothened out. When the forces that create liquidity (viz RBI action in the money market, government spending etc) overshadow the process of liquidity reallocation, you tend to have liquidity spikes.

    As for the credit offtake figures, take them with a pinch of salt. At times when credit offtake numbers were healthy, a lot of it was just loss financing of oil imports, the burden of which falls on the banking system.

  • Deepak Shenoy says:

    >Hey that's what we're here for, to learn, aren't we?

    If what I said suggested the liquidity in the "system" would come down by bank lending, I apologize – that was not the intention. The idea is: if banks aren't lending money out, and are ok with getting less than the lowest they might need to pay (savings bank interest rate) then somethings off the rocker.

    Not sure how that read as "bank lending reduces liquidity in the system". All it will do is reduce the amount they park in reverse repo, I suppose.

    But I agree with you that credit offtake figures are probably unreliable and have to be understood in context. Still, the dramatic increase in the reverse repo should only mean there aren't good enough avenues to lend (or banks are averse to the thought at the mo)

  • michaeld says:

    >Very nice article. See also: