Questions and Answers
Which factor contributed to the increase in surplus liquidity in Emerging Market Economies (EMEs)?
What is the percentage of incremental cash reserve ratio (I-CRR) imposed by the Reserve Bank on the increase in NDTL?
Which country had the highest reported interest rate among the EMEs listed?
What main economic indicator is primarily affected by monetary policy tools like the I-CRR?
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What type of response is typically expected from financial markets when a central bank reduces reserve requirements?
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Which monetary policy tool is indicated by the Weighted Average Call Rate mentioned in the data?
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What can be inferred from the 3-month CP yield compared to the 3-month T-Bill yield?
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Which economic indicator can be directly affected by changes in the SDF Rate?
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How does an increase in the Repo Rate typically affect inflation expectations?
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What does the spread between CP and T-Bill yields reflect about financial market conditions?
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Study Notes
Surplus Liquidity Management
- Emerging Market Economies (EMEs) displayed varying interest rates as of May 2023, with New Zealand at 5.50% and South Africa at 8.25%.
- The Reserve Bank of India implemented an Incremental Cash Reserve Ratio (I-CRR) of 10% on the increased net demand and time liabilities (NDTL) of all scheduled banks between May 19 and July 28, 2023, due to rising surplus liquidity.
Interest Rates and Treasury Bills
- As of May to September 2023, the 3-month T-Bill rates fluctuated between 6.75% and 6.92%, indicating a general trend in short-term government borrowing costs.
- The 3-month Commercial Paper (CP) rates showed significant variance, ranging from 7.15% to 8.40%, while 3-month Certificate of Deposit (CD) rates ranged from 6.91% to 7.56%.
Government Securities (G-Sec) Yields
- 5-year G-Sec yields were reported between 7.04% and 7.35%, whereas 10-year G-Sec yields ranged between 7.06% and 7.35%.
- The AAA Corporate Bond rate for 5 years hovered around 7.56% to 7.85%, indicating the general cost of borrowing for highly-rated corporations.
Liquidity Injection and Monetary Policy
- The Reserve Bank injected liquidity through six main operations and nineteen fine-tuning Variable Rate Reverse Repo (VRR) operations during Q4, effectively managing excess liquidity.
- The total net liquidity adjustment facility (Net LAF) showed significant variation, with figures ranging from ₹14,185 crore to -₹29,323 crore, highlighting tight liquidity conditions in certain periods.
External Economic Indicators
- The US 10-year treasury yield fluctuated between 3.66% and 4.36%, suggesting shifts in global financial conditions impacting emerging markets.
- Crude oil prices for the Indian basket ranged from 75to75 to 75to93 per barrel, affecting inflation and trade balances in India and its impact on monetary policy.
Market Dynamics
- The relationship between Commercial Paper and T-Bill rates indicated spreads varying significantly, with a peak spread of 144 basis points, reflecting investor sentiment and liquidity preferences.
- Ongoing fine-tuning VRR auctions were crucial for absorbing excess liquidity to realign money market rates with the prevailing monetary policy stance.
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Description
This quiz explores the recent trends in surplus liquidity management across emerging market economies, highlighting varying interest rates and relevant policies from May to September 2023. Participants will also learn about government securities and treasury bill rates, offering insights into the broader economic landscape.
