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Fixed Income

Term Repo Goes at 8.42%, MSF No Longer the Operational Rate

The third term repo auction – this one for 14 days, and for 38,500 crore rupees – was bid at 8.42%. This is below the weighted average rate of 8.71% last time – and primarily because the MSF rate was brought down 0.25% (to 8.75%) on Oct 29.

The interesting thing is that with the term repo and the regular repo (both around 40,000 cr.) we see demand for the MSF diminishing. The MSF is now getting lesser and lesser as the operational rate.

MSF Borrowing

The next time this chart is updated you will see term repo being double of what it was since term repo limits were also increased.

Let me state that I’m all in favour of a bid repo rather than fixed rates, both for overnight repo and term repo. That way it is obvious how much banks want to pay for liquidity. There should be no rep limits – as long as you have securities, go ahead.

The MSF rate should be at least 15%. Then banks can bid anywhere in the middle, and only ultra desperate borrowing should happen at the MSF rate, which should only be done with collateral below the SLR requirements (that is, banks can even lend some SLR limited securities for this ultra desperate borrowing).

Having said all this, the operational short term rate is now falling – from the MSF level of 8.75% to a hybrid of the repo/term repo rates (7.75% to 8.4%). The market rates (CBLO, Call money, market repo) are trading between the 7.75% and 8.75% limits, which means liquidity is no longer tight.

While markets are rejoicing and banks are bouncing back, the fact that rates – hybrid – are still lesser than CPI inflation bothers me. Note carefully that much of this turmoil has not translated to any further market (except in short term mutual funds). Bank lending and deposit rates remain the same, which means there is no real “transmission”. Controlling inflation is going to need much higher rates, even if they seem to have stabilized.

  • Rakhi says:

    Interested to know more technical of nifty.

  • Right. In fact, recourse to RBI financing, by whatever name called (Repo, MSF, LAF etc) should be the last option for banks, only to be resorted to during extreme situations like a run on the bank, or to meet overnight shortfalls in clearing. RBI needs to crack down on banks who are using RBI as a regular source of funding. RBI lending to banks at administered rates is a subsidy to banks at the cost of depositors, who are deprived of higher deposit rates, and needs to be stopped immediately.

  • mangoman says:

    It is dark comedy. Almost all the banks are using RBI for day to day operations. By keeping the liquidity flowing RBI Governor is self boasting about inflation control.
    Meanwhile Dollar Index is inching up and 10 year US yield is 2.62.
    Hope atleast the external pressure or issues will solve the issues india facing now. Great leveller can only be initiated by outside forces. Local clowns ( RBI and FM won’t do that)