Factors affecting money market rates {Excel on CBLO-CD allocation attached}

Money market rates move in tandem with liquidity condition in an economy. As far as India is concerned major factors affecting liquidity are
• Currency in circulation
• Government cash balance
• Credit Deposit Growth differential
• Open Market Operations
• FX intervention (spot markets)

Liquidity deficit is structural in nature. Every quarter end heavy chunk is sucked from the system on account of advance tax outflows. Liquidity also marginally gets worse every month end/start as currency in circulation increases on account of salary draw down  Sale of govt. resources also affects liquidity due to cash outflow. Situation of liquidity going forward can be to some extent easily analyzed contemplating above factors. Normally in the month of February and August end fund managers sit on cash awaiting better yield CDs as tight liquidity and heavy supply increases the yield of short term papers. Now they probably work on whether to invest in CD right away at 9.05 %( hypothetical) or wait (i.e. invest in CBLO synonym to cash @7.75% [near to RBI’s REPO rate]) for few days and pick same maturity CD at 9.25%.

Below is the excel sheet wherein one can contemplate and see if it’s better to lock in money in a CD right away or wait for sometime placing the same cash in CBLO.

Download – Money Market Investment Decision

Examples performed

If CD rates after 20days are expected to be at 9.40%. Currently CD is at 9.05%. CBLO is at 7.75% then probably it is better to get into CBLO for 20days then invest in CD @9.40%. Annualized yield would then be 2bps higher comparatively.

If CD rates after 25days are expected to be at 9.40%. Currently CD is at 9.05%. CBLO is at 7.75% then probably it is better to get into CD right away at 9.05%. Annualized yield would then be ~6bps higher comparatively.

Appreciate your inputs…

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