LTROs, TLTROs and WMA given to central government and state governments are keeping system liquidity high. RBI has been buying USD in May and June and has taken up fx reserves to record USD 500 billion and this is also helping keep system liquidity high.
RBI net outstanding forward sales were USD 1.739 billion as of April 2020, as against net forward sales outstanding of USD 4.939 billion in March 2020, RBI sold USD 3.2 billion of forwards sales position.RBI net sold USD 1.142 billion in the spot market in April, taking out Rs 85.89 billion of liquidity into the system.
System liquidity fell by around Rs 525 billion month on month and was at a surplus of Rs 5500 billion as of 11th June 2020. Reverse Repo stood at 6583.15 billion. Cash management bills (CMB) outstanding was at Rs 1600 billion. Currency in circulation rose by Rs 504.18 billion in May 2020.Special Liquidity Facility for Mutual Funds (SLF-MF) stood at Rs 24.30 billion
The ICDR as of 22nd May 2020 was 45.20%, credit grew by Rs 6016.05 billion, year on year, while deposits grew by Rs 13309.67 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 Facility | 15-04-20 | 15-05-20 | 11-06-20 |
|---|---|---|---|
| Repo | 0 | 0 | 0 |
| Term Repo | 0 | 0 | 0 |
| LTRO | -1251.17 | -1251.17 | -1251.17 |
| TLTRO | -750.41 | -1129 | -1129 |
| Reverse Repo | 6,896.55 | 7,834.39 | 6583.15 |
| MSS, CMB Bonds Outstanding | 800 | 800 | 1600 |
| Marginal Standing Facility | -15.76 | 0 | 0 |
| Standing Liquidity Facility Availed from RBI | -56.47 | -228.72 | -302.28 |
| Liquidity Deficit/Surplus | 5,622.74 | 6,025.50 | 5500.7 |
| Incremental Liquidity Deficit/Surplus | 1143 | 403 | -525 |
| Liquidity Drivers | March 13th 2020 - April 14th 2020 | April 15th 2020 - May 14th 2021 | May 15th 2020 - June 11th 2022 |
| Growth Currency in Circulation | -393.25 | -288.68 | -504.18 |
| RBI FX Operations USD Billion | 0 | 0 | 0 |
| RBI FX Operations Inflow/Outflow INR Billion | -309.74 | 0 | 0 |
| RBI OMO Sale | 0.25 | 100 | 0 |
| RBI OMO Purchase + Government Repurchase | 584.7 | 849.11 | 0 |
| Government Surplus/Deficit | 0 | 0 | 0 |
| RBI Fx Forward Sales (-)/Purchase (+) Outstanding USD Billion | -4.94 | 0 | 0 |
| RBI Fx Forward Inflow/Outflow INR Billion | 0 | 0 | 0 |
| Inflows/Outflow from Government | 0 | 0 | 0 |
| Adjustment | 1,261.00 | -257 | -21 |
| Net Inflow/Outflow of Liquidity | 1143 | 403 | -525 |