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Fixed Income

MSF Expands to 40K crore, Liquidity is Going To Get Very Expensive

MSF Borrowing continues to rise, with more then 40,000 cr. (Rs. 400 billion) borrowed for the four day holiday over the weekend. I had earlier posted that it has spiked just before the weekend.

For theory, read: The Marginal Standing Facility.

(We get data only on the following day, so this information has a one-day lag)

MSF Borrowing since July 17

The MSF rate is now 10.25%, and banks are paying that much for this excess borrowing.

What’s happening with that is that all short term rates are up. Today, (Aug 12) rates are up to 10.15% to 10.25% in the overnight markets.

Since the last fortnight, banks are now required to keep 99% of CRR at all times with the RBI, banks have been cautious and put more than 105% in CRR on all days. This is about 20,000 cr. extra that yields no return for banks.

Cash Maintained as % of CRR required

With the 22,000 cr. worth auctions this week, expect rates to tighten even more, and MSF borrowing to increase. 

Impact: Expect banks to raise short term deposit rates. Some banks will have to raise base rates. Market short term yields haven’t been impacted very badly yet, but the damage may take a few days to come.