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There is No Liquidity Problem. But Will Rajan Raise Rates?



Ahead of the December 15 intermediate tax payment due date, liquidity in the system is not at all tight. With the 14-day term repo increased to 48,000 cr. (more than the otherwise normal 38,000 cr.) banks are borrowing using that, rather than overnight borrowing.


What you see is that the 14 day term repo is satisfying bank needs for liquidity. This term repo is an auctioned yield, and the latest on friday was 8.06%.

Note from the above graph that liquidity isn’t tight by any means. The last spike, of MSF going to 1.4 trillion (and repo at 400 billion) was just before the last tax due date (Sep 15). This spike is nowhere close.

MSF Is the Marginal Standing Facility.

Banks have reduced MSF exposure (which comes at 8.75%) to miniscule amounts. We don’t know what the MSF needs are for Friday – we’ll only know on Monday – but there is an additional MSF today (Saturday) for any last minute urgent needs.

Banks have even reduced their overnight repo needs, which is limited to about 40,000 cr. in total, to a much lower amount, going negative earlier this month. (that is, banks are offering RBI in reverse repo more money than they are borrowing in repo)

There is no liquidity problem.

The RBI has printed over $10 billion worth of rupees after the FCNR swap, and this money sits with banks at this time. That’s 60,000 crore rupees of additional liquidity available. This will result in inflation within a year from now, because that’s what inflation is from, primarily.

The latest print for Consumer Price Inflation is 11.24%. The print for Wholesale Price Inflation is on Monday, and likely to be above 7%.

In this context, it is imperative now to raise rates. Making money easily available solves a liquidity problem, but to solve the issue of inflation, money has to be made much much more expensive. This cycle should see repo rates of 10% or more, and while it doesn’t look like Dr. Rajan will do the “needful”, he might not be left with too much choice.


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