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Charts & Analysis

RBI Removes 46,000 cr. of Money Supply, Sells Bonds. What’s Cooking?

Exactly what is the RBI doing?

  • It’s just conducted a reverse repo auction (where banks park cash with the RBI) for a whopping Rs. 45,663 cr. Banks have placed that much excess liquidity with the RBI till Friday, for about 7.88%. (This isn’t regular reverse repo which is at 7% – it’s a variable rate auction where banks bid at interest rates to place money withe the RBI)
  • It has also sold Rs. 10,345 cr. of government bonds. That much money will go back to the RBI and thus, go out of the banking system.

In effect, this takes out around Rs. 56,000 cr. of liquidity from the system!

The net daily injection of money from the RBI has gone negative again (after a brief dip to below zero a month back). This is net of – the daily repo and reverse repo, the variable term reverse repo and repo auctions announced ad-hoc, and finally, the four term repo auctions conducted constantly.

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In the week ended Oct 31, Reserve Money grew just 7.7%.

If RBI is taking liquidity out of the system it could be because:

  • It’s buying dollars and thus adding money into the system and is using these mechanism (bond sales and/or reverse repo pull outs) to sterilize this flow. Otherwise we’ll have too many rupees and that’s inflationary.
  • Banks are unable to lend out money and as credit growth falls, the excess money in banks has to be parked somewhere.

It’s probably the former – since the RBI is buying dollars and the dollar remains constant against the rupee even as inflows are at the highest. We have discussed this in a recent Capital Mind Premium letter with data and graphss.

But it could be a bit of the latter as well – with no credit growth banks will have to park excess cash somewhere.

When RBI takes such sudden and drastic action to shore up dollar reserves and pulls out liquidity we could be seeing the beginning of something way more sinister than is currently known. Typically such times come and go; but once in a while they end up being the effect of a huge festering crisis. Which one of these is happening today?

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  • ]{umar says:

    Good post. RBI might be shoring up currency reserves for two reasons. 1. It might want to target a certain ratio of GDP to a basket of currencies for holding reserves, or better still, target a certain ratio of external liabilities to reserves. As corporates have borrowed abroad, the RBI might feel the need to keep the ratios in a range and buy dollars. 2. The RBI feels it must have adequate firepower for the crisis. At some point, the headwinds in Europe and China (and Japan) might become very real and lead to a flight to quality and unwinding of the carry trade. The RBI must have adequate reserves to prevent disorderly and extremely large moves during that time.

  • lohit says:

    The recovering US economy is a bit of a mixed bag for us. Possibly good for our IT industry. But, a growing US economy combined with Fed hawkishness could lead to the dollars heading back. Brings back faint memories of 1997. The RBI could be building a war-chest.

  • rkg says:

    There was also 33k of bond redemption on 3rd. Lower SLR effect in a backdrop where deposit growth is far above loan growth, could also contribute to short term excess in systemic liquidity. Why not MSBs…and on Saturdays call rates are half-a-percent..

  • Kunal Damle says:

    Good Post, but what is the crisis this could be forewarning on us? And what kind of impact on Equities in India would it have?

  • Higher liquidity reduces call rates below the policy rate RBI sets and that will make everyone rise the eyebrow at RBI. This could a sign that RBI is not willing to reduce rate any time soon. Moreover too much liquidity harms the Rupee and also reduces pressure on inflation which RBI has put with high rates.

  • Pedda_Gedda says:

    If they don’t do this RBI will lose control of rates. With liquidity being flush (due to higher financial savings + inflows), policy rate will lose its meaning if RBI doesn’t mop up liquidity. This is just the beginning

  • The recovering US economy is a bit of a mixed bag for us. Possibly good for our IT industry. But, a growing US economy combined with Fed hawkishness could lead to the dollars heading back. Brings back faint memories of 1997. The RBI could be building a war-chest.
    htt