Net LAF may soon turn positive along with RBI’s Open Market Operations as banks scramble for liquidity; WACR/Repo differential turns negative

Impact: Neutral (Liquidity)

Brief: There is a significant correlation between a rising WACR and MSF as banks scramble for liquidity. As peer lending becomes more difficult, lending ideally rises not only under LAF and MSF but OMO as well. On the contrary though, both net LAF and net OMO are currently negative

At Rs. (-) 135,449 million, Net Repo operations, under Liquidity Adjustment Facility (LAF) continue to be in the negative territory despite a looming danger of WACR/ Repo parity. As per our understanding, the current scenario pertaining to a net negative Repo as well as OMO persists since FY17, when WACR/ Repo differential normalized to (+)28 bps, on average.

It should not be forgotten however that before this timeframe, the said differential was (-) 8 bps, on average in FY16 with net Repo being positive. Curiously, the net OMO turned negative, only to check the excess liquidity created from earlier operations such as during FY15.

Now that the RBI has increased the SLR carve out by 2% (through the Facility to Finance Liquidity Coverage Ratio) under the overall HQLA Basal 3 framework, the intent of the central bank is clear. Short term money is therefore endangered and the preparations for the impending liquidity demand are under way. Considering the recent developments and past trend, the WACR/ Repo differential of(-) 7 bps warrants an increase of commercial bank demand for liquidity under LAF. Also, it is realistic to estimate that the demand under Marginal Standing Facility (MSF) will be much higher in the coming months as compared to same time last year, when the differential was a somewhat healthy (+) 13 bps. This is because the management of daily liquidity will become paramount in coming months. Pitching in, OMO infusions will not be far behind either. Rising offtake given unrealistic yields (in the capital markets), outflow of capital and recent RBI mop ups of the remnants of demonetization can all be blamed for these difficult times.

Annual Repo WACR Repo (Net) MSF SLF OMO (net sales)
FY14 8 8.1 467,062 158,128 305 -582340
FY15 7.5 7.41 74,985 15,937 -1160 627480
FY16 6.75 6.83 42,386 10,385 -114 -523240
FY17 6.25 5.97 -54,673 6,391 -34 -1104940
FY18 6 5.87 -153,186 11,400 29 887750
FY19* 6.5 6.57 -135,449 5,994 -10.1 -306,600

Source: CMIE; *YTD Data; in Million Rupees