On 28th November Government of India Surplus Cash Balance increased sharply by Rs 1.4 trillion to Rs 1.415 trillion. The rise in sharp rise government surplus cash balance was overnight and raises the question of how did the government receive such high inflows. Third quarter advance tax payment is due only on the 15th of December and the government has not done any stake sales during this period.
Could it be that inflows into banks on demonetisation has seen black money being declared? In the 8th November to 27th November period, banks received gross deposits of Rs 8.4 trillion, ( Rs 330 billion of exchange of notes and Rs 8.1 trillion of deposits) of which they have parked Rs 3.7 trillion through reverse repos and have maintained over Rs 3.5 trillion as additional CRR. Banks have had to borrow Rs 3.5 trillion through RBI repo auction in order to maintain incremental CRR. Banks have also seen withdrawals of Rs 2.1 trillion.
The government has provided a disclosure window for black money and if the rise in government surplus any indication, individuals are using this window to disclose black money instead of letting it go down the drain.
Of the close to Rs 14.9 trillion of Rs 500 and Rs 1000 notes, banks have received more than half as deposits and if there is steady trickle of black money disclosure over the next one month, government’s fiscal will look extremely good. RBI would be able to cut rates to ward off demonetisation effect on growth and bond yields would trend down sharply from hereon.
The Incremental CRR imposed on banks starting this fortnight beginning 26th November, will immediately impound around Rs 3 .5trillion of liquidity. Banks are lent over Rs 5 trillion through reverse repo to the RBI of which, reverse repos maturing in the next one week is around Rs 2.5 trillion. Banks can also exchange old notes for immediate credit for CRR with the RBI.
Banks while flushed with liquidity, will be scrambling for cash this week to maintain CRR. Money market rates and bond yields will rise initially on the back of the RBI move, but will then fall again as this move is temporary and will be reviewed next fortnight. Bond markets are expecting a 50bps rate cut on the back of expected fall in GDP growth and inflation on the demonetisation move by the government. Read our analysis on “Bond markets have factored in a 50bps rate cut”.
Bank stocks will get hit as banks have to pay interest on deposits while they do not receive interest on CRR.
RBI has announced temporary measures by applying an incremental cash reserve ratio (CRR) to absorb a part of surplus liquidity created due to demonetisation.It has been decide that on the increase in NDTL (net demand and time liabilities) between 16th September 2016 and 11th November 2016, scheduled banks need to maintain an incremental CRR of 100%, starting the fortnight from November 26, 2016. Further It is likely to be reviewed on 9th December 2016 or even earlier.This temporary measure intended to drain excess liquidity in the system.
During 16th September to 11th November bank deposit increased 3.811 trillion,