LTRO, TLTRO, WMA Keeping System Liquidity High - April 2020

LTROs, TLTROs and WMA given to central government and state governments are keeping system liquidity high despite continued pressure on INR due to capital outflows.

As a one-time measure to help banks tide over the disruption caused by COVID-19, RBI decided to reduce the cash reserve ratio (CRR) of all banks by 100 basis points to 3% of NDTL with effect from the reporting 28th March 2020. This reduction in the CRR released primary liquidity of about Rs 1370 billion uniformly across the banking system

RBI bought USD 9.1 billion in February, infusing over Rs 650 billion of liquidity into the system. However, with the INR falling to record lows, RBI will be selling USD to prevent excessive volatility in the currency and this will take out liquidity.

RBI is carrying out special liquidity operations. The central bank announced iquidity measures such as LTRO/TLTRO in the face of coronavirus effect on markets.

RBI net outstanding forward sales were USD 2.295 billion as of February 2020, as against net forward sales outstanding of USD 1.215 billion in January 2020, RBI sold USD 1.08 billion of forwards. RBI net bought USD 9.14 billion in the spot market in February, infusing Rs 648.83 billion of liquidity into the system.

System liquidity gained by around Rs 1143 billion month on month and was at a surplus of Rs 5622 billion as of 14th April 2020. Reverse Repo stood at 6896.55 billion. Cash management bills (CMB) outstanding was at Rs 800 billion. Currency in circulation rose by Rs 393.25 billion in April 2020.RBI is also injecting liquidity into the system through LTROs, outstanding at Rs 1251 billion and TLTRO of Rs 750 billion.

The ICDR as of 27th March 2020 was 60.18%, credit grew by Rs 6001.9 billion, year on year, while deposits grew by Rs 9972.69 billion. Banks have to maintain CRR of 3% and SLR of 18.25%, and ideal ICDR for liquidity neutrality for banks is around 75%.

Liquidity Cheat Sheet
The Liquidity Cheat Sheet is for assessing system liquidity and the drivers of system liquidity.

System liquidity is defined as bids for Repo, Reverse Repo and Term Repo/Reverse Repo LAF (Liquidity Adjustment Facility), Long Term Repo Operations (LTROs)/Targeted Long-Term Repos Operations (TLTROs) auctions held by the RBI. Drawdowns from MSF and Export Credit Refinance Facility are the other constituents of system liquidity.

The need for liquidity is largely driven by the requirement to maintain CRR (Cash Reserve Ratio) balances with the RBI. CRR as of April 2020 is 3% of NDTL (Net Demand and Time Liabilities). Deficit system liquidity suggests that banks require to borrow from RBI to maintain CRR balances while surplus liquidity suggests that banks have excess funds over and above maintaining CRR balances.

The drivers of system liquidity include Currency in Circulation (outflows), RBI fx purchase (inflows)/ sales (outflows), RBI OMO sales (outflows)/purchase (inflows) and government surplus (outflows)/ deficit (inflows).

Currency in Circulation is money going out of banking system and being held as cash by the public. For example, if you draw cash from an ATM, money goes out as cash. Currency in Circulation is determined by need to hold cash for transactions and cash held as black money. Inflation affects need to hold cash as value of goods and services increases due to inflation.

RBI purchasing USD adds INR liquidity while USD sales lower INR liquidity as the central bank pays or receives INR for buying/selling USD.

RBI selling bonds through OMO takes out liquidity as markets pays RBI for buying bonds while bond purchases through OMO infuses liquidity as RBI pays the market for buying bonds. Maturity of RBI forward sale/purchase contracts also affect system liquidity.

Government surplus is money kept with the RBI while government deficit is money borrowed from the RBI. Government surplus is liquidity negative as money goes out of banking system into government account with RBI. Government deficit is liquidity positive as RBI lends money to government through WMA (Ways and Means Advances) facility. Government spends money by drawing down on WMA and that adds to banking system liquidity.

Others include IPO inflows that add to bank deposits, spectrum and other license auctions that add to government cash balances and MSS (Market Stabilization Scheme) that takes out liquidity from system as market pays for purchasing MSS bonds.

Advance tax payments goes out of banking system into government account with the RBI every quarter i.e. 15^th of June, September, December and March.

Government bonds that mature and come up for redemption adds to banking system liquidity as money goes from government to holders of the bonds.

Government pays interest of around Rs 4000 billion every year and that adds to system liquidity.

Liquidity Operations (In INR Billions)