Increased domestic borrowings has put pressure on systemic liquidity; WACR/ Repo differential at 4 bps evokes liquidity pressures

Impact: Negative (Corporate Borrowing); Negative (Consumer Market)

Brief: Weighted Average Call Money Rate (WACR), which is the base on which the Repo is calculated and a proxy for inter-bank lending - has risen to 6.46%; highest since FY16 end. The differential between WACR and Repo is now just 4 bps, signifying liquidity pressures faced by the banking system

Domestic financing is creating liquidity pressure in the banking system as external financing becomes less attractive during this time. Financing its deficit from external market sources has been highly expensive for Indian Government as its 10-Yr GSec bond yields have reached a four year high – nearing 500 bps. Therefore, the Government is avoiding financing from external market and relying extensively from internal sources. Consequently, funding from domestic market has recorded a 13% growth in FY19 (YTD). Funds raised from domestic market sources reached Rs. 5.8 trillion as on August 2018, as against Rs.5.2 trillion during the same time, the previous year. External sources however lost favor, in contrast, as debt issued dropped by (-) 30% - currently pegged at Rs. 36 billion (FY19 YTD).

Therefore, an additional Rs. 67,000 crore worth of capital was raised internally (YTD); this has resulted in tremendous money market pressures as commercial banks exhaust their liquidity in Government debt acquisitions. We reckon that this very concern influenced the RBI to increase repo rate by 50bps consecutively over the last two MPC meetings in order to spur savings. Fear not unfounded as assessing the WACR (Weighted Average Call Money Rate) and Repo rate differential average from quarterly perspective suggests that in Q2, FY19 - it has reached 20 bps (nearing the lower side of liquidity). A WACR of 6.46% on a Repo of 6.50% indicates that it is now becoming expensive for banks to lend each other and finance short term trades. This level has been already reached on 14th September 2018, signifying a serious liquidity deficit in the system.

  External Market Domestic Market
FY19 FY18 FY19 FY18
April 10 7 1509 2050
May 12 20 1924 1657
June 17 23 818 660
July -9 -8 1121 640
August 5 8 505 193
YTD 36 51 5877 5200

Source: RBI; Acuité Research

Quarter LAF (Rs. Bln) OMO (Rs. Bln) WACR Repo Spread Yield (10-Yr Indian G-Sec)
Jun-16 2.6 -805.1 6.35 6.5 0.15 7.5
Sep-16 -8.2 -199.9 6.34 6.5 0.16 7.2
Dec-16 -55.4 -100.0 6.07 6.25 0.18 6.6
Mar-17 -132.3 0.1 5.98 6.25 0.27 6.6
Jun-17 -166.0 0.1 5.98 6.25 0.27 6.8
Sep-17 -143.0 600.0 5.92 6 0.08 6.5
Dec-17 -136.0 299.8 5.84 6 0.16 7.0
Mar-18 -167.7 -12.2 5.87 6 0.13 7.6
Jun-18 -144.2 -206.6 5.91 6.25 0.34 7.7
Sep-18* -107.0 -100.0 6.30 6.5 0.2 7.8

Source: RBI; Acuité Research; *Until September 14th 2018

Our exciting journey started in 2005 with rating of bank borrowers most of whom were small and medium enterprises. At that time, credit rating was a concept known only to large issuers of capital market instruments. Since then, like a caterpillar transforms itself into a beautiful butterfly, we transformed to rate bonds, bank facilities of large corporates and issuers across industries. Along came many achievements - SEBI Registration in 2011, RBI accreditation in 2012, 50,000 ratings in 2018, 5,000 Bond and Bank Loan Ratings in 2017, launch of India's first Android and iPhone app to disseminate rating, tamper-proof QR-code-enabled rating rationales, and SMERA Terminal to name a few.

Now is the time to re-emphasize our increasing footprint across all segments of ratings through the launch of our new name - 'Acuité'.

The name has changed. The spirit of upholding highest standards of analytical rigour, continuous improvement, excellence in our processes and quest for innovation remains the same. We would like to re-emphasize that we will continue to work hard to provide independent, unbiased and timely opinion of highest standard.

Acuité means 'sharpness and clarity of thought and vision'. Let our research and ratings help you take decisions with confidence.

Sankar Chakraborti