Finance 3.0 - Social Network for Finance
Smart financial thinking
"Killing" made by Banks using risk free money market arbritage opportunities
I was wondering by seeing the money market rates these days and could not draw a conclusion. needs help...
Consider typical rates as under:
Yield on 1 year G sec - 5%
Market Repo: 3%
CBLO - 2.75%
RBI Reverse Repo - 3.25%
Now if a bank has Rs 100. How do it make huge risk free returns? My understanding is as under:
1. Bank purchases Gsec for Rs 100 - earns 5% interest.
2. Now pledges it in CBLO and takes Rs 100 cash - pays 2.75% interest
3. Ploughs back Rs 100 with RBI's reverse repo and get securities in return - earn 3.25%
4. pledges the RBI securities with CBLO & takes cash - pays 2.75%
5. plouhs back Rs 100 with RBI reverse Repo - earn 3.25%
and then repeats step 4 & 5 again and again until these opportunities cease to exist. I am following the markets on a daliy basis for almost an year now and have seen these arbitrage opportunities almost daily.
My question is then: why the banks are not doing it? and if they are doing it how come RBI is not aware of this?
Please note that these opportunities exist because ONLY Banks are allowed in the RBI Reverse Repo markets and almost ALL entities (MF/insurance/corporates etc) are allowed in the CBLO market.
Request your valuable guidance.
Consider typical rates as under:
Yield on 1 year G sec - 5%
Market Repo: 3%
CBLO - 2.75%
RBI Reverse Repo - 3.25%
Now if a bank has Rs 100. How do it make huge risk free returns? My understanding is as under:
1. Bank purchases Gsec for Rs 100 - earns 5% interest.
2. Now pledges it in CBLO and takes Rs 100 cash - pays 2.75% interest
3. Ploughs back Rs 100 with RBI's reverse repo and get securities in return - earn 3.25%
4. pledges the RBI securities with CBLO & takes cash - pays 2.75%
5. plouhs back Rs 100 with RBI reverse Repo - earn 3.25%
and then repeats step 4 & 5 again and again until these opportunities cease to exist. I am following the markets on a daliy basis for almost an year now and have seen these arbitrage opportunities almost daily.
My question is then: why the banks are not doing it? and if they are doing it how come RBI is not aware of this?
Please note that these opportunities exist because ONLY Banks are allowed in the RBI Reverse Repo markets and almost ALL entities (MF/insurance/corporates etc) are allowed in the CBLO market.
Request your valuable guidance.
Replies to This Discussion
-
Permalink Reply by Sachidanand (Sacha) Singh on -
Good analysis but remember, CBLO rate is weighted average. For instance today the highest was 3 and lowest was .25%. Moreover, by the time one will get the cash at CCIL the repo / reverse repo window at RBI will be closed for the day. Thus the funds borrowed at CBLO can be lent to RBI on T+1. Thus the process is not as risk-less as it appears.
However, that is not to say that arbitrage opportunities do not exist.
-
Permalink Reply by Naresh Goyal on -
Thanx Sacha...
Appreciate your valuable guidance...
rgds
Naresh
-
Permalink Reply by Naresh Goyal on
-
Sacha - could you guide on the difference between the CBLO and Market REPO? It the difference lies only in CBLO being an annonymus order matching driven electronic platform and Market REPO being primarily an OTC product?
Why there is a significant rate and volume varioation in Market REPO and CBLO (Rate is less & volume is high on CBLO compared to Market REPO)?
-
Permalink Reply by Sachidanand (Sacha) Singh on
-
There are two more differences - a) for CBLO you need to place your order in advance with approved securities; b) I think (I am not certain as the instructions keep on changing - last I knew, PSU bonds were allowed for market repo but not approved for CBLO) market repo is allowed on a wider range of securities than are approved for CBLO. Market repo is resorted to as the second choice. That explains the lower volumes. And as market repo is resorted to only when CBLO is not available (lack of approved securities, time constraints etc) the lenders ask for their pound of flesh.
-
Permalink Reply by Naresh Goyal on
-
Thanx Sacha...
-
Permalink Reply by Yen Yong on -
not sure the actual situation of yours. but i did experience this when i was in money market.
evey bank has counter party limit with one or another. so, this kind of funny situation may happen. some banks may have to pay more for them to raise money at whole sale market place. you just squeeze the banks that are over leverage (loan / deposit ratio)
-
Permalink Reply by Anup on
-
could you please tell where did you get this data from? As i'm doing some research on inflation vis a vis RBI Monetary policy, but not getting data on daily basis. If you can please send me data which you have and also the site where you get the data from.
thanks in advance
Anup Agarwal.
-
Permalink Reply by Sachidanand (Sacha) Singh on
-
You would find at RBI web site - Database on Indian Economy under the tag Database
-
Permalink Reply by Neha Bhandari on
-
In your Pt # 3, can u please highlight what securities does RBI give to investors as collateral ??
-
Permalink Reply by Naresh Goyal on
-
It is Government Stock or T-Bills, the same as it accepts in Repo.
Sign in
Badge
Continuing Education
 |
Accounting |
 |
Banking Regulations |
 |
Certification Training |
 |
Commercial Bank Management |
 |
Corporate Finance & Valuation |
 |
Treasury Management |
 |
Credit Risk Management |
 |
Financial Derivatives |
 |
Financial Institution Management |
 |
Financial Markets |
 |
Financial Modeling |
 |
Financial Planning |
 |
Market Risk Management |
 |
Operational Risk Management |
 |
Operations & Compliance |
 |
Quantitative Analysis |
 |
Strategic Financial Management |
Newsletter
Linkedin
RSS
Facebook
Widgets
Twitter© 2010 Created by Finance 3.0.
