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Fixed Income

The Government Is Borrowing for One Month at 12.24%

The safest rupee investment is (not the dollar) the central government debt. Because indirectly they own the printing press that prints the rupee.

And that government has just paid 12.237% to borrow some money for one month.

Cash management bills – 11,000 cr. rupees worth – have been auctioned, and they have been purchased at an effective yield of 12.237%, the highest in recent history.

Cash Management Bills go at 12.24%

Remember this is another way the RBI is removing liquidity from the system, by auctioning 22,000 cr. of CMBs every week. Tomorrow is another auction (of 27 day bills).

Of course, even now, this is just profit for banks that can borrow under the MSF from the RBI at 10.25%, upto Rs. 76,000 cr. overall. MSF borrowing is at about 40,000 cr. and we will reach the limit in just three more such auction. After that, there will be a serious problem.

Update: It seems the limit is actually 2.5%, not 1% of NDTL. (Circular) That means nearly 200,000 cr. can be borrowed under the MSF (about 40,000 of it only under a mutual fund repo window, where mutual funds can borrow at 2.5%).

If banks can borrow 160,000 cr. under the MSF at 10.25%, they could do this trade all day and back! Borrow overnight at 10.25%, buy the 12.2% cash management bills, and do this just for 28 days.

Note – this does not cut any liquidity anywhere. All the money being taken out of the system will just be borrowed back under the MSF window. RBI isn’t that stupid, so expect that in the next two days it will curtail MSF borrowing to 1% or even 0.75% of NDTL. Game over much faster.

(I want the game over part – it is currently a train wreck in slow motion)

Another post coming up on the yield curve.

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