Commercial banks reap windfall from surplus liquidity arbitrage

The weighted common Trep charge, which was above 5 per cent within the closing week of January, declined to 4.4 per cent on Tuesday, after closing at 4.27 per cent on Monday.

Liquidity surplus within the banking system, measured by funds parked by banks underneath the liquidity adjustment facility (LAF), has exceeded ₹3 trillion. The SDF charge, fastened at 25 foundation factors under the coverage repo charge, stands at 5 per cent.

Banks positioned a file ₹5.3 trillion within the SDF on Friday, adopted by ₹4.5 trillion on Monday, in response to RBI knowledge. The banking system is flush with liquidity on account of authorities spending, bond purchases by the central financial institution, and dollar-rupee buy-sell swap operations.

“The massive quantity parked within the SDF is because of surplus liquidity within the system. Moreover, some banks could also be borrowing at decrease charges within the Trep market and parking these funds within the SDF to seize the unfold,” mentioned a supplier at a main dealership.

“The crash in cash market charges has trickled to CD charges, which seems to be a deliberate effort,” mentioned a market participant. “Banks want deposits, on condition that credit score offtake is usually excessive within the closing quarter.”

With the SDF charge at 5 per cent and the Trep charge buying and selling nearer to 4.40 per cent, the RBI is permitting in a single day charges to ease, a transfer that’s serving to compress time period premia on the brief finish of the yield curve, significantly within the one- to three-year phase.

“Liquidity situations have turned distinctly snug, with funds parked within the SDF largely reflecting surplus liquidity within the system. The RBI’s latest open market operations and overseas trade swap transactions have augmented sturdy liquidity to round ₹6 trillion,” mentioned V R C Reddy, treasury head at Karur Vysya Financial institution.

“As well as, 90-day variable charge repo operations of about ₹1.31 trillion have additional added to surplus situations. Beneath regular circumstances, the RBI would have absorbed this extra by way of VRRR auctions; nevertheless, it has consciously refrained from doing so… The central financial institution seems snug permitting in a single day charges to melt. That is already feeding by way of to cash market pricing, placing downward stress on certificates of deposit charges and compressing time period premia on the brief finish of the yield curve, significantly within the one- to three-year phase,” he added.

The weighted common in a single day name cash charge was buying and selling at 5.03 per cent on Tuesday, whereas the weighted common in a single day Trep charge stood at 4.40 per cent, in contrast with the earlier shut of 4.27 per cent. Solely banks are permitted to park funds on the name cash charge.

Though the LAF window provides the next charge, parking funds underneath the LAF requires banks to supply eligible authorities securities as collateral and to take part throughout the designated working window, which coincides with regular market hours. In contrast, the SDF permits banks to park funds with out collateral and is offered later within the day, making it operationally simpler — significantly when surplus funds come up near market shut or when banks choose to preserve securities.

Following the extension of the in a single day name cash market buying and selling hours to 7 pm, the central financial institution determined that the standing deposit facility and the marginal standing facility (MSF) can be obtainable between 7 pm and 11.59 pm with impact from July 1 2025.

Within the present calendar 12 months, the weighted common in a single day name charge has softened by 53 foundation factors, whereas the weighted common in a single day Trep charge has declined by 120 foundation factors over the identical interval.