Bank borrowings from the Reserve Bank of India (RBI) on Wednesday dropped to nine-month low. Banks borrowed Rs 17,215 crore from the central bank's daily repo window compared with Rs 6,850 crore recorded on October 04, 2012. In banking parlance, it is called as easing in liquidity deficit.
However, banks parked surplus funds worth Rs 6,035 crore through reverse repo window. So, the net borrowings stood at Rs 10,880 crore as compared with Rs 6000 crore recorded on October 04, 2012.
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Repo is the rate at which banks borrow money from RBI, currently at 7.25 percent. Reverse repo is the rate at which banks put surplus funds at 6.25 percent. Both are daily auction windows, which RBI carries out under the liquidity adjustment facility (LAF).
Broader reason and future outlook
"The easing liquidity suggests that the government has already started spending," Jitendra Arora, senior vice president – investments at ICICI Prudential Life Insurance told moneycontrol.com.
"With this money is coming back into the system. Going forward, it may rise to an extent but will remain in the range of Rs 50,000 -75,000 crore, which still remains under RBI's comfort zone. The deficit may expand on account of leakages in the currency market," he said.
RBI intervention and liquidity
When RBI intervenes in the currency market directly to stem rupee's free fall, it sells dollars and buys rupees. This in turn, sucks out rupee liquidity in the market. However, this does apply to the case when the central bank intervenes through state-owned banks. In that case, money remains within the banking system only.
CBLO and repo rate differential
Meanwhile, the rate in the CBLO (Collateralized Borrowing and Lending Obligation) market fell below the repo rate. The weighted average rate (WAR) stood at 6.82 percent as against 7.25 percent in the repo rate. CBLO volume spurted to Rs 1.01 lakh crore compared with a daily average daily volume of around Rs 60,000 crore.
"Banks rushed to borrow cheap money from CBLO due to the rate differential. Accordingly, volumes rose there while they dropped in the repo borrowing. The phenomenon too helped repo borrowing to reach nine month low," said Arvind Konar, head of fixed income at Almondz Global Securities.
Banks and mutual funds are participants in the CBLO market.