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Charts & Analysis

Chart Of The Day: Repo Goes Beyond 150K cr.

More than 155,000 cr. was taken as Repo today, which is much higher than what RBI is comfortable with (1% of bank deposits or “Net Demand and Time Liabilities” – 1% of NDTL is about 58,000 cr.)

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It is likely that to stem the fall of the rupee, RBI has been selling dollars and buying rupees. Those rupees go out of circulation, which leaves little on the table, so banks have to borrow overnight through repo (at 8.5%) RBI has been doing OMO auctions to purchase govt bonds and pay in rupees, so they add to the supply but since they have to take a substantial position to really impact the rupee, it is likely that the net impact has still taken out more rupees than have been printed fresh.

I think this is also something to help the RBI position monetary policy. Given that inflation is 7.47% and growth continues, they are unlikely to cut rates next week. But the liquidity problem may prompt them to cut the Cash Reserve Ratio (CRR) from the current 6% down to, say, 5.5%. That will free 29,000 cr. from the banking system (i.e. they don’t have to borrow that much overnight).

But repo highs are about 1.73 lakh crores, reached in December. It has been that high in 2010, and usually is bad in December. So we probably shouldn’t read too much into it.