Banks step up borrowing through MSF as liquidity falls

Currently, liquidity in the banking system is estimated to be in a surplus of around Rs 25,833.57 crore.

Banks have resorted to  increased borrowing through the Marginal Standing Facility (MSF) route in the last few days on account of tightening liquidity in the system, according to Reserve Bank of India (RBI) data.

The MSF is a window for banks to borrow from the central bank in an emergency situation, when inter-bank liquidity dries up completely.

“Liquidity came under pressure post the implementation of the incremental cash reserve ratio (I-CRR). This  was evident from the increase in MSF borrowings, which have gone up to Rs 90,895 crore as on August 23,” said Mataprasad Pandey, Vice President of Arete Capital Service.

"The liquidity conditions have tightened significantly since the product buildup began post the announcement of I-CRR. This has been followed by the GST related outflows from the system further tightening the liquidity conditions. The surge in Marginal Standing Facility (MSF) is a reflection of this," said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.

Under I-CRR, banks need to set aside an additional 10 percent of the deposits raised between May 19 and July 28.

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How much have banks borrowed via MSF?

Since the outflows due to GST payments from the banking system, MSF borrowing has increased substantially. According to the RBI, banks borrowed Rs 89,813 crore via MSF on August 21, Rs 87,095 crore on August 22, and Rs 90,895 crore on August 23.

The borrowings reduced after marginal improvement in liquidity on August 24, when banks borrowed Rs 50,113 crore.

Why did liquidity tighten?

The liquidity in the banking system tightened sharply over the past few days following heavy outflows due to GST payments and the I-CRR.

The liquidity, which was in a huge surplus at the start of the month, went into a deficit earlier this week for the first time in the current financial year.

This forced most banks to borrow funds from the call money market, which led to a sharp increase in overnight rates. Currently, the weighted average overnight call money rate is 5 basis points (bps) above the MSF rate. The overnight call money rate is the rate at which banks borrow short-term funds from each other.

Arun Bansal, Head of Treasury at IDBI Bank, said that as the call money rate has crossed the MSF rate, any prudent banker will opt for MSF at 6.75 percent.

Further, Bansal said that since banks can avail of the MSF at the last moment, it’s better to wait and meet the shortfall in cash from the MSF.

After a deficit for about three days, the system saw a slight surplus as of August 25 due to inflows from reversal of  the 14-day variable rate reverse repo and some coupon payments, dealers said.

Currently, liquidity in the banking system is estimated to be in a surplus of around Rs 25,833.57 crore.

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Will this trend continue?

Money market dealers said borrowings will fall significantly in the coming days due to government spending on account of salaries and pensions.

“MSF borrowing will fall in the next 2-3 days after government spending kicks in,” said a dealer with a state-owned bank.

Further, dealers added that the call money rate will also soften post the improvement in liquidity conditions.