Accesing Impact Of Daily Limit Removal On Banks’ Deposit Window

The Central Bank of Nigeria(CBN) recently removed the N2 billion daily limit on funds placed at the Standing Deposit Facility (SDF) window, a move that has seen the net deposits of banks at the CBN window soar to N2.3 trillion in October as against a monthly average net borrowing of N1.4 trillion this year.

With the removal of the limit, analysts say, they expect liquidity in the money market to remain tight as banks leverage interest paid on SDF as well as the other liquidity mopping measures of the apex bank. The applicable interest rate on SDF moved to 15.75 per cent at an asymmetric corridor of +100/-300 basis points around the 18.75 per cent MPR in July 2023.

The SDF is like a savings account for banks at the central bank. Banks can deposit extra money there, and the central bank pays them interest. It is one of the measures the apex bank uses to control how much money is available in the banking system and influence interest rates.

Last week, interbank rates which is the rate at which banks led to each other expanded further by 194basis points to 16.7 per cent. The rise in interbank rates was due to banks sterilising their excess cash through the CBN’s SDF window which was at the highest last Monday at N888.72 billion.

Asides the increased use of the SDF window, there was also a withdrawal of N499.86 billion from the system through Cash Reserve Requirements (CRR) debits as well as Open Market Operation (OMO) auction settlements of N477.20 billion. These withdrawals had put pressure on the system liquidity with the average system liquidity last week settling at a lower net short position of N333.50 billion compared to a net long position of N46.48 billion in the previous week.

Last week, the CBN had conducted another OMO auction, selling N400 billion across three tenors, with the 365-day bill closing at 17.50 per cent. Two days later it held another OMO bill auction, selling instruments worth N77.20 billion.

The stop rate averaged 15.36 per cent across the three tenors, with the 365-day bill closing at 17.98 per cent. Analysts say irrespective of how frequent the OMO auctions become going forward, they believe the aim is to serve dual functions of mopping up system liquidity and attracting foreign portfolio investments (FPIs). 

Analysts at Cordros Capital Research said, they anticipate a sustained liquidity squeeze in the system next week as “we believe banks will most likely continue to leverage the CBN’s SDF window to earn income. In addition, we anticipate that outflows from next week’s auctions (OMO & NTB) and possible CRR debits may stoke further pressure on the system. Thus, we expect the OVN rate to remain elevated amid the absence of significant inflows in the financial system.”

Similarly, analysts at Cardinal Stone note that the two OMO auctions held by the CBN last week highligts increased mop-ups and the move to incentivise foreign investors. The noted further that the move is consistent with the need to ease foreign exchange pressures and systematically enhance carry-trade.

“The CBN mopped up N477.2 billion in both auctions, propping up the effective yield on the 1-year bill to 21.9 per cent. In our view, the sharp increase in OMO rates will likely drive upward pressures on NTB yields, with banks likely to rotate into higher-yielding OMOs. 

“Yield continues to surge in the local bond market partly due to aggressive government borrowings. For context, the government raised a total of N724.8 billion in October, comprising N350.0 billion from sukuk bonds and N374.8 billion through the monthly bond auction. 

“Aside from government borrowings, we perceive that the gradual normalisation of monetary policy must have stoked higher yields. Unless there is a corresponding re-rating in the relatively sticky long-end of the bond curve, our prognosis for higher NTB yields may lead to a temporary yield curve inversion.”

The CBN had, last week, started clearing parts of its outstanding foreign exchange backlogs, beginning with the banks that make up a smaller portion of the total outstanding forex forwards. While traders say settlement of outstanding matured forex forwards does not indicate an intervention, but the apex bank just honouring its past obligations, they note that the move by the apex bank show its renewed determination to solve the challenges stoking the existing forex liquidity constraints.

According to the data obtained from FMDQ, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) declined month on month by 6.2per cent to $1.23 billion in October after hitting a 3-month high of $1.31 billion in September. 

Meanwhile, the naira appreciated by 1.8 per cent to NGN776.14/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), with total turnover at the market (as of 02 November 2023) decreasing by 28.6 per cent WTD to $443.09 million, as trades were consummated within the N475.00 – N1101.00/$ band.

In the Forwards market, the naira rates recorded appreciation across the 1-month (+6.0 per cent to N787.21/$), 3-month (+6.2 per cent to N801.43/$), 6-month (+6.5 per cent to N823.49/$), and 1-year (+6.4 per cent to N877.59/$) contracts.