On Friday, the overnight FX swap closed at 10.75% (-55bp) and the weighted-average rate for the whole session printed at 11.34% (-48bp). As we have highlighted previously, the CBR set a generous limit for the one-week repo auction, so it does not come as a surprise that the money market rates declined markedly. Meanwhile, demand for the CBR's standing facilities narrowed further, with banks securing only RUB 76bn in the overnight repo window. A combination of the regulator's FX purchases and a running budget deficit change the liquidity balance slowly, but steadily.
Separately, we think that treating 312-P loans as part of the open-market operations toolbox is misleading. In our view, a 312-P granted against a pool of corporate loans as collateral represents a funding tool, given that the maturity structure of these instruments is, by design, longer than the average period between monetary policy meetings. In addition, we think that scaling down the size of 312-P term loans is not as straightforward as in the case of OMO instruments. That might shake the stability of the banking system as it directly influences the term of banks’ liquidity position, i.e. a rapid outflow of 312-P funds would most likely result in the minimum requirements for regulatory liquidity management being broken at some banks. Therefore, we think that 312-P loans need to be considered as part of the CBR's domestic investment portfolio. To recap, the next 3-month 312-P auction for RUB 600bn is scheduled for 13 July, while the CBR is also offering RUB 500bn for 18 months on 27 July. The minimum rate at both auctions equals the key rate plus a 25bp spread.
This effectively means that the CBR can sterilise only RUB 1.5tn in repo instruments in order to make FX purchases and budgetary deficit covered mostly by the Reserve Fund neutral from the liquidity point of view. We estimate the YTD budget deficit at around RUB 0.9tn, which implies at least RUB 1.0tn more into the year end. Meanwhile, at the current pace the CBR is injecting around RUB 200bn of liquidity monthly via FX purchases. Therefore, we think that the banking system is likely to turn into a liquidity surplus before the end of the year, which means that the CBR's deposit rate would become the boundary benchmark for the money market.