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Russia on the Way to Structural Banking Liquidity Surplus: Cross-Read to Rates

ФИО студента: Kononov Ivan

Руководитель: Luca Gelsomini

Кампус/факультет: International College of Economics and Finance

Программа: Financial Economics (Master)

Год защиты: 2017

This paper examines the main channels through which liquidity conditions, namely gradual transition from liquidity deficit to surplus, impact overnight funding rates. Contrary to the conventional approach, I focus on FX overnight swap instead of single currency funding. The former has proven to be far more liquid and therefore far more representative of the changes in interbank funding conditions in Russia. With cross-currency funding in focus, this paper studies both rouble and dollar liquidity in the Russian banking system, as well as the specific seasonal effects brought about by the specifics of the reserves regulation in Russia. The main goal of the paper is to build a model that would enable one to forecast RUB implied rate in FX overnight swap, based on the available daily market data. I find that the spread between the implied rouble rate in USDRUB overnight swap and the key rate is negatively related to the volume of the rouble cash excess in the system and growing structural liquidity surplus. Even when the liquidity surplus is fully-absorbed by the regulator, the rate gravitates towards the lower half of the policy corridor. Non-sterilised excess cash has been found to put 4.8x times greater downward pressure on the rate – possibly because as it represents the physical immediate cash excess, which spurs the natural market flow. The paper examines both rouble liquidity and onshore dollar liquidity to control for cross-currency funding effects. I find that the spread is positively driven by proxies for global financial conditions and dollar funding supply by the Central Bank and the Ministry of Finance. Intuitively, loose onshore dollar funding conditions translate into lower dollar funding rates, which is equivalent to higher rouble implied rates in the FX swap. That said, in terms of rates, the injection of dollar liquidity is directionally equivalent to the absorption of roubles, and vice versa.

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