Weekly Liquidity Report 6 August

10 August 2018

The liquidity report presents an assessment of the liquidity scenario of India’s banking and financial system for the week ended 10 August’18. An evaluation of various indicators such as repo and reverse repo transactions, call money rates, T-bills and G-Secs yields, government borrowings, bank deposit and credit growth and key global interest rates has been undertaken here to help illustrate the underlying system level liquidity scenario.

Key highlights for the week ended 10 August ’18

  • Barring 9 Aug’18, the banking system liquidity was in surplus for the week of 6-10 Aug’18. The banking system has witnessed a liquidity surplus since 1 Aug’18. Despite this week being a fortnightly reporting week for the scheduled commercial banks, the banking system liquidity remained in surplus during the week.

  • Despite the overall system level surplus, the call money rates rose during the week and touched a 20 month high of 6.43% (8 Aug’18) owing to increased demand from some segments of the banking system. The average call money market rate rose by 19 bps to 6.36% from that in the previous week.

  • The average daily call money market borrowings were higher at Rs. 14,186 crs during the week compared with the borrowings of Rs. 13,951 crs in the previous week.

  • The benchmark 10 year GSec yields ended the week marginally lower i.e. 1 bps lower (7.75%) from the previous weeks close. Yields rose to 7.79% during the start of the week and thereafter declined. The softening of crude oil prices, lower fiscal deficit and the dividend pay-out by the RBI to the government contributed to the fall in yields. The weakness in the domestic currency, fresh supply of government securities, concerns over the US interest rate hikes and the resultant sell off of Indian bonds limited the fall in yields.

  • The benchmark 10 year GSec yields ended the week marginally lower i.e. 1 bps lower (7.75%) from the previous weeks close. Yields rose to 7.79% during the start of the week and thereafter declined. The softening of crude oil prices, lower fiscal deficit and the dividend pay-out by the RBI to the government contributed to the fall in yields. The weakness in the domestic currency, fresh supply of government securities, concerns over the US interest rate hikes and the resultant sell off of Indian bonds limited the fall in yields.

  • Government borrowings i.e. of the central (Rs.12,000 crs) and state governments (Rs.12,700 crs) amounted to Rs. 24,700 crs during the week.

  • Bank credit offtake continues to improve in the on-going fiscal and has witnessed a year-on-year growth of 12.4% as on July 20’ 2018 compared with 5.8% in the previous year. The incremental credit growth (1 Apr – 20 July) has witnessed an improvement from -2.3% in FY18 to -0.1% in FY19 indicative of the uptick in economic activity.

  • US treasury yields declined to a 3 week low of 2.86%. Increased safe haven buying amid escalating geo-political and trade concerns and the turmoil in emerging market currencies viz. the Turkish Lira aided the decline in yields. The fall in yields was however limited by the fresh issues ($78 bn) of government securities and the strengthening of the inflation which raised expectations of a hike in interest rates by the Federal Reserves at its Sep’18 meeting.

  • LIBOR largely remained unchanged at 2.34% during the week.

Source: RBI – *Based on CARE’s calculation

Net Repo Outstanding Transactions = Total Repo +MSF – Total Reverse Repo

Source: RBI

  • The net liquidity of the banking system has largely been in surplus since 1 Aug’18. The banking system liquidity moved from a net liquidity deficit of Rs. 37,637 crs on 30 Jul to a net liquidity surplus of Rs 20,851 crs on 10 Aug.

  • The total repo borrowings have declined from Rs. 85,804 crs on 30 Jul’18 to Rs. 50,314 crs on 10 Aug’18. On the other hand, the reverse repo transactions have increased from Rs. 48,167 crs on 30 Jul to 71,165 crs on 10 Aug, reflective of improved overall liqudity position.

  • The call money market rate rose during the week and ended the week at 6.37%, 36 bps higher than the close of the previous week. The average call rate has increased by 19 bps during the week from an average of 6.17% in the previous week to 6.26% during the week.

  • The rise in call money market rates despite the favorable overall liqudiity situation can be attributed to the increased demand for funds from certain segments of the banking system that faced liquidity pressures.

  • The average daily borrowings in the call money market during the week ended 10 Aug at Rs. 14,186 crs, was marginally higher by 2% from the average borrowings of Rs. 13,951 crs in the previous week.

Source: RBI

  • Incremental bank credit growth in FY19 (1 Apr-6 Jul) was (-0.1)% compared with the growth of (-)2.3% in the comparable period last year. Likewise, the incremental bank deposit growth was 0.1% in FY19 (1 Apr-20 Jul) compared with (-1.7%) in the comparable period in FY18.

Liquidity Outlook for the week 13 Aug–17 August, 2018

The overall liquidity situation in the banking system is likely to be pressured during the forthcoming week. The scheduled auction of central government securities (Rs.12,000 crs on 16 August) and increase in the currency in circulation on the back of festive demand could pressurise liquidity in the banking system.

Author:

Madan Sabnavis, Chief Economist

Kavita Chacko, Senior Economist

Contact:

Rachna Gupta, Manager – Training

Mail: rachna.gupta@care-cart.com

Tel: +91-22-67543674