Liquidity Cheat Sheet

12 Jul 2020

RBI Pumps Up Liquidity through Fx Purchases – Liquidity Cheat Sheet July 2020

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RBI has been buying USD in May & June and has taken up fx reserves to record USD 513 billion and this is also helping keep system liquidity high. RBI has added around Rs 2.2 trillion through fx purchases.

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Paresh Nemade

RBI has been buying USD in May & June and has taken up fx reserves to record USD 513 billion and this is also helping keep system liquidity high. RBI has added around Rs 2.2 trillion through fx purchases.

RBI net outstanding forward sales were USD 1.958 billion as of May 2020, as against net forward sales outstanding of USD 1.739 billion in April 2020, RBI added USD 219 million of forwards sales position. RBI net bought USD 4.363 billion in the spot market in May, infusing Rs 327.24 billion of liquidity into the system.

System liquidity fell by around Rs 1161 billion month on month and was at a surplus of Rs 4339 billion as of 13th July 2020. Reverse Repo stood at 6263.68 billion. Cash management bills (CMB) outstanding was at Rs 800 billion. Currency in circulation rose by Rs 66 billion in June 2020.RBI Special Liquidity Facility for Mutual Funds (SLF-MF) stood at Rs 24.30 billion.

The ICDR as of 19th June 2020 was 43.34%, credit grew by Rs 5962.62 billion, year on year, while deposits grew by Rs 13746.47 billion. Banks have to maintain CRR of 3% and SLR of 18.00%, and ideal ICDR for liquidity neutrality for banks is around 75%.

Liquidity Cheat Sheet
The Liquidity Cheat Sheet is for assessing system liquidity and the drivers of system liquidity.

System liquidity is defined as bids for Repo, Reverse Repo and Term Repo/Reverse Repo LAF (Liquidity Adjustment Facility), Long Term Repo Operations (LTROs)/Targeted Long-Term Repos Operations (TLTROs) auctions held by the RBI. Drawdowns from MSF and Export Credit Refinance Facility are the other constituents of system liquidity.

The need for liquidity is largely driven by the requirement to maintain CRR (Cash Reserve Ratio) balances with the RBI. CRR as of April 2020 is 3% of NDTL (Net Demand and Time Liabilities). Deficit system liquidity suggests that banks require to borrow from RBI to maintain CRR balances while surplus liquidity suggests that banks have excess funds over and above maintaining CRR balances.

The drivers of system liquidity include Currency in Circulation (outflows), RBI fx purchase (inflows)/ sales (outflows), RBI OMO sales (outflows)/purchase (inflows) and government surplus (outflows)/ deficit (inflows).

Currency in Circulation is money going out of banking system and being held as cash by the public. For example, if you draw cash from an ATM, money goes out as cash. Currency in Circulation is determined by need to hold cash for transactions and cash held as black money. Inflation affects need to hold cash as value of goods and services increases due to inflation.

RBI purchasing USD adds INR liquidity while USD sales lower INR liquidity as the central bank pays or receives INR for buying/selling USD.

RBI selling bonds through OMO takes out liquidity as markets pays RBI for buying bonds while bond purchases through OMO infuses liquidity as RBI pays the market for buying bonds. Maturity of RBI forward sale/purchase contracts also affect system liquidity.

Government surplus is money kept with the RBI while government deficit is money borrowed from the RBI. Government surplus is liquidity negative as money goes out of banking system into government account with RBI. Government deficit is liquidity positive as RBI lends money to government through WMA (Ways and Means Advances) facility. Government spends money by drawing down on WMA and that adds to banking system liquidity.

Others include IPO inflows that add to bank deposits, spectrum and other license auctions that add to government cash balances and MSS (Market Stabilization Scheme) that takes out liquidity from system as market pays for purchasing MSS bonds.

Advance tax payments goes out of banking system into government account with the RBI every quarter i.e. 15th of June, September, December and March.

Government bonds that mature and come up for redemption adds to banking system liquidity as money goes from government to holders of the bonds.

Government pays interest of around Rs 4000 billion every year and that adds to system liquidity.

Liquidity Operations (In INR Billions)

Liquidity Adjustment Facility15-05-2011-06-2014-07-20
Term Repo000
Reverse Repo7,834.396583.156,263.68
MSS, CMB Bonds Outstanding8001600800
Marginal Standing Facility000
Standing Liquidity Facility Availed from RBI -228.72-302.28-343.03
Liquidity Deficit/Surplus6,025.505500.74,340.48
Incremental Liquidity Deficit/Surplus403-525-1160
Liquidity DriversApril 15th 2020 - May 14th 2020May 15th 2020 - June 11th 2020June 12th 2020 - July 14th 2020
Growth Currency in Circulation-288.68-504.18-66.08
RBI FX Operations USD Billion0-85.89327.24
RBI FX Operations Inflow/Outflow INR Billion-85.89327.240
RBI OMO Sale-1000-100
RBI OMO Purchase + Government Repurchase849.110100
Government Surplus/Deficit0-1.74-1.96
RBI Fx Forward Sales (-)/Purchase (+) Outstanding USD Billion-1.74-1.960
RBI Fx Forward Inflow/Outflow INR Billion000
Inflows/Outflow from Government000
Net Inflow/Outflow of Liquidity403-525-1160
Information herein is believed to be reliable but Arjun Parthasarathy Editor: does not warrant its completeness or accuracy. Opinions and estimates are subject to change without notice. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The financial markets are inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved. Unauthorized copying, distribution or sale of this publication is strictly prohibited. The author(s) of the content published in the site may or may not have investments in the assets discussed in the pages/posts.

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