Posts tagged repo
First quarterly review of monetary policy 2010-11
Highlights of the policy
RBI Governor, Dr D V Subbarao announced the first quarterly review of monetary policy today. The measures taken were quite on the expected lines (Read our article on monetary policy expectations).
- Benchmark Repo rates hiked by 25 bps to 5.75% with immediate effect.
- Benchmark Reverse Repo rates hiked by 50 bps to 4.50% with immediate effect.
- The interest rate corridor between the Repo and Reverse Repo window reduced to 125 bps from 150 bps.
- CRR, SLR and Bank rate kept unchanged at 6%, 25% and 6%, respectively.
- Baseline inflation projection for March 2010 increased to 6% from 5.5%.
- Baseline estimate for GDP growth for 2010-11 revised to 8.5% from 8%.
- Bank deposit growth target of 18% maintained for FY2010-11; Bank deposit growth stood at 15.0% year-on-year as on July 2, 2010.
- Bank credit growth target of 20% maintained for FY2010-11; Bank credit growth stood at 22.3% year-on-year as on July 2, 2010.
- RBI to undertake mid-quarter policy reviews starting September 2010.
Impact of monetary policy
- As expected, RBI has raised the policy rates. This is the fourth rate hike since March this year raising the Repo by a total of 100 bps and Reverse Repo by 125 bps. Moving differently from earlier moves, the quantum of change in the policy rates; repo and reverse repo is different (What are policy rates?). The Liquidity Adjustment Facility (LAF) corridor has been shrunk to 125 bps, a change first time since November’2008.
What this means?
Short term interest rates, particularly, interbank repo market rates hover in between the LAF corridor in order to prevent arbitrage opportunities for the banks. Because of tight liquidity conditions, short term rates have been quite volatile. This measure is aimed at containing this volatility in the rates.
- Since end-May, banks have been borrwoing from RBI through its LAF Repo window. Out of four rate hikes since March, two were effected when there was ample liquidity in th system. But the last two have come at a time when the liquidity conditions have tightened. Thus interest cost of banks will go up. Assuming that banks will borrow about Rs 50,000 cr for the year as whole from Repo, the combined efect of the last two hikes will shave off about Rs 250 cr from banking sector’s profits.
- What would also hurt banks’s profitability is that deposit rates have also risen. Thus lending rates, in general will go up in order to protect net interest margin (NIM).
- Inflationary expectations have driven RBI to raise the rates. Policy stance of RBI has shifted to “to containing inflation and anchoring inflationary expectations”. RBI has noted that inflationary expectations have firmed up. Accordingly, RBI has also raised the projection for end-March 2011 to 6%. RBI has commented that it will continue to take actions to counter inflationary expectation.
- Though RBI has not hinted at further rate hikes, but its strong concern for inflation implies that good growth prospect along with continued high inflation will in make it imperative fro RBI to increase rates.
Author:Praveen Bajaj
Bond market/ G-Sec update
Yields on Government securities rose to the highest level in two weeks following the mid-term 25 bps rate hike by RBI on last Friday. Benchmark 10 year bond, 7.80% 2020 security rose 8 bps to 7.64% from 7.56% close of last week.
As expected, yields opened stronger on Monday, but later were dragged down due to buying in the securities. Due to reduced fiscal deficit, RBI had announced a reduced borrowing last week. Same was expected for the week as well. But RBI announced the issue of securities worth Rs 12,000 cr. Along with this, rally in US treasuries kept the sentiments up in bond market. Yields weakened till 7.57% on Wednesday.
Liquidity conditions eased slightly compared to the last week. Amount borrowed from RBI’s repo window averaged above Rs 50,000 cr for the week. Indian Financial Services Secretary R Gopalan commented that liquidity crunch in the Indian banking system was expected to ease in the next 10-15 days.
Benchmark 10 year bond daily movement
However, with the release of stronger weekly inflation figures, yields again started hardening. the primary articles index moved up by 1.4% marking a YoY inflation growth of 16.08% as compared to 14.75% observed a week earlier. The Fuel and power index rose steeply by 4.5% taking the inflation rate to 18.02% compared to 12.9% a week earlier. The index factored in higher prices of petrol, diesel, kerosene and LPG as announced by the Government on June 25th.
Markets clearly are factoring in another rate hike at the July 27 announcement of First quarter review of monetary policy. All fixed income market rates have hardened. While commercial paper rates were seen hardening since June beginning, G-sec rates have started hardening recently. Next week we have Index of Industrial Production (IIP) and WPI monthly release both of which would be important guiding factor for RBI to decide on interest rates.
To read earlier updates click here
Author:Praveen Bajaj
Bond market/ G-Sec update
After a hefty 8 bps points jump on Friday of last week due to decision to free up fuel price (read MB update here), G-sec markets opened the week on a strong note. Announcement by RBI that the borrowing amount for the week will be at the reduced levels kept the sentiments up. Yields on benchmark 10 year bond 7.80% 2020 fell 6 bps to 7.59%.
Following 3 days also witnessed buying and yields fell to 7.52% till Thursday. This was the lowest close on yields since June 9, 2010.
Benchmark bond daily movement
Positive sentiments in the bond market were also enhanced due to the rally in US treasuries. Primary articles’ inflation came in at a lower figure of 14.75% for the week ended 19 June compared to 17.6% for the earlier week. Fuel index also came in lower at 12.9% compared to 13.18% for the earlier week. This also kept the sentiments positive in bond market.
Friday however saw some correction with profit booking coming in at higher levels. Yields on benchmark bond increased 4 bps to 7.56% over Thursday. On a weekly basis, the yields have decreased 10 bps.
Govt sold bonds worth Rs 10,000 cr all which were fully subscribed and yields were at the expected level. Liquidity in the system remained tight with average volumes on Repo window stood at Rs 63,400 cr.
The rate hike of RBI (read MB update here) was announced after market hours and hence the weekly closing yield does not factor in the hike. It is expected that bonds will open on a weaker note on Monday and the sentiments would carry on for the week. Thus yields should trade with a positive bias for next week.
Author: Praveen Bajaj
Weekly G-Sec update:June19, 2010
High inflation released on Monday set the tone for the week. As expected, with the release of inflation above 10% mark, yields on benchmark 7.80% 2020 bond rose 8 bps to close at 7.69% on Monday under fears that RBI might be forced to raise rates to tame inflation. Rates also rose after comments from Finance Secretary Mr Ashok Chawala that bond issuance schedule will not be postponed which led to buying in bonds.
However, after Monday, we saw buying returning to the bonds as comments from RBI officials said that liquidity easing measures will be taken. RBI bought back bonds worth Rs 8,307 cr against a target of Rs 100 cr announced further buyback of bonds worth Rs 10,000 cr on June 21.
Liquidity condition did ease in the current week. Till last week, liquidity was tight due to 3G spectrum payment and advance tax payment by banks and companies. For the week, average of the combined volumes on 1st and 2nd window of repo stood at Rs 34,855 cr compared to Rs 60,311 cr for the last week.
Going forward, we expect the liquidity conditions to ease but the same will not go back to the levels of Rs 35,000-40,000 cr of surplus due to good credit demand part of which is evidenced by the good credit growth for the fortnight ending June 4, 2010.
All these put yields in a comfortable position and yields closed at 7.56% for the week compared to 7.61% last week, and 13 bps down from highest point of the week.
High inflation has sparked debate of a rate rise by RBI again and market will be very sensitive to comments from RBI and Finance ministry officials. We expect yields to trade with a positive bias for the week.
Author:Praveen Bajaj
Weekly G-Sec update:June 12, 2010
After trading in a range last week, yields on benchmark 10 year bond, 7.80% 2020 bond steadily rose 9 bps for the week to close at 7.61% for the week. Surge in yields was driven by tight liquidity conditions.
On all days of the week, we saw Repo window being active. Daily average of the combined amounts on 1st and 2nd window of Repo stood at Rs 60,311 cr for the week compared to Rs11,800 cr for last week. Tight liquidity conditions are driven by the advance tax payment by corporate.
Concerns of higher inflation have also kept the yields on a higher side. Some media reports cited a Govt official expecting inflation to cross 10% mark for the month of May. Good IIP numbers also added to the pressure.
Govt borrowing is progressing in a phased manner. After Friday’s auction, borrowing worth Rs 125,000 cr has been completed amounting to 27% of the total borrowing. Borrowings amid tight liquidity conditions have kept the yields at elevated levels.
For next week inflation (WPI) will be the most watched factor and a high inflation will lead to a surge in yields.
Author name:Praveen Bajaj
Banking terms explained
Friends, in many of the posts on this website, our analysts have used terms like repo rate, reverse repo rate and host of other ratios which might not be easily comprehensible to many of us. I have been receiving some queries regarding them as well. So here goes my small bit on few of these important ratios. I have also tried to explain in brief how these ratios are used by regulators to control inflation-
Repo transaction
The term Repo has been derived from the word repurchase which literally means selling today and buying back at a later date. To be specific, in money market terms, it means a repo trader sells securities, gets funds for a certain specified time, and after this time period, purchases back the securities by paying the previously taken (read borrowed) funds along with some interest for the said period. The securities in question basically act as an insurance against borrower’s default. A forex money market also repo works on similar terms.
Repo rate
In the above transaction, if the lender of the funds is RBI, it I termed as a repo transaction with RBI. Following may be noted-
- Whenever the banks have any shortage of funds they can borrow it from RBI.
- Repo rate is the rate at which banks borrow rupees from Reserve Bank of India (RBI).
- A reduction in the Repo rate will help banks to get money at a cheaper rate.
- When the Repo rate increases borrowing from RBI becomes more expensive.
- The rate charged by RBI for its Repo operations is 5.25%.
- When RBI lends money to bankers against approved securities for meeting their day to day requirements or to fill short term gap, it takes approved securities as security and lends money. These types of operations are generally for overnight operations.
- Repo rate is the medium through which RBI infuses funds in the system. Recently, in view of the decreased (read tightening) liquidity conditions, RBI has allowed a second Repo facility which means that RBI is giving banks to borrow money from RBI and thus RBI is looking to infuse more money into the system
- A bank’s money market trader typically can use RBI’s LAF and money market for arbitrage opportunities sometimes
Reverse repo rate
If the borrower of the funds is RBI, it is termed as reverse repo transaction.
- Reverse Repo rate is the rate at which RBI absorbs money from the system.
- Banks are always happy to lend money to RBI since their money is in safe hands with a good interest.
- An increase in Reverse Repo rate can cause the banks to transfer more funds to RBI due to attractive interest rates.
- It can cause the money to be drawn out of the banking system.
- The rate charged by RBI for its Reverse Repo operations is 3.25%.
Cash Reserve Ratio (CRR)
CRR is the amount of funds that the banks have to keep with RBI. It is calculated on the total deposits that the bank has as on the date. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. In order to understand this, consider following example-
- Suppose RBI says the CRR as 5%. Now if a bank A receives Rs.100 as deposit then it can lend Rs.95 as loan and will have to keep Rs.5 as balance in Deposit account.
- Now the Borrower who has received Rs.95 as loan will deposit the same in his bank, borrower’s bank will now lend him Rs.90.25 and keep Rs.4.75 in deposit account.
- This process continues in the banking system resulting to expand its initial deposit of Rs.100 to maximum of Rs.2000.
- Similarly if suppose RBI says the CRR as 10%. Now if a bank A receives Rs.100 as deposit then it can lend Rs.90 as loan and will have to keep Rs.10 as balance in Deposit account.
- Now the Borrower who has received Rs.90 as loan will deposit the same in his bank, borrower’s bank will now lend him Rs.81 and keep Rs.9 in deposit account.
- This process continues in the banking system resulting to expand its initial deposit of Rs.100 to maximum of Rs.1000.
- Higher the CRR, the lower the money available for lending, resulting into reduction in credit expansion by controlling the money that goes out of loans.
- Thus RBI increases the requirement of CRR whenever they feel the need to control money supply.
Central bank of any country uses a combination of these 3 rates to influence the lending rate in the economy and thus contain inflation and stimulate growth. This adjustment of the 3 rates (commonly known as policy rates) is known as monetary policy.
Relation between Inflation and Bank interest Rates: How does inflation affect rates?
Inflation, in simple terms is a sustained increase in general price level. In other words, it can also be described as a situation in which excess money chases fewer goods, causing increase in demand of goods and thus leading to an increase in price. Thus if this demand created by excess money can be curtailed, inflation would be contained. This is the genesis behind controlling inflation through monetary policy.
If inflation is high, interest rates are increased. If repo, ie rates at which banks borrow from RBI, is increased, such borrowing will become costly and banks would thus either borrow less or pass on this increased cost to their borrowers. Again if reverse repo is increased, banks would divert more funds towards RBI and excess liquidity will be absorbed by RBI rather than going at cheaper cost in the economy. In either of the cases, actual lending will be less and demand for goods and services will be less
In the case of CRR, if the rate is increased, it affects in two ways. First, immediate liquidity in the system is absorbed to the extent CRR is increased as more money needs to be placed with the regulator. Second, in the incremental lending, potential capacity of banks to lend is curtailed. This again leads to less lending by banks.
Another ratio which does not directly affect inflation but is important for banking is statutory liquidity ratio.
Statutory Liquidity Ratio (SLR)
SLR is the amount a commercial bank needs to maintain in the form of cash or gold or approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI in order to control the expansion of bank credit. SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their anytime demand. RBI ensures the solvency of a commercial bank from SLR. It is helpful to control the expansion of Bank Credits. By changing the SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in government securities like government bonds.
Currently, in India, banks have to maintain a SLR of 25% which means that 25% of the value of demand and time liabilities has to be invested in approved securities. SLR of banking system in India has a SLR of about 27% ie above the statutory SLR because due to the economic crisis, banks were conservative in lending and invested in sae heaven Government securities.
Hope this article would be useful and help you in understanding the economic scenario better.
Author: CA Shalini Tibe
