I am working on a presentation on the Romanian interest rates and I thought to share the following graph with you. It shows the overnight deposits (OD) at the NBR versus overnight deposits at the BNR minus the REPO operations. Why is this important?
M1 has to components: currency and OD of banks at the NBR. I am not going to show you here but the OD are at least twice the size of currency in circulation. When the central bank intervenes in the FX market the banks will pay for EUR with their money from the OD and thus the NBR lowers the money supply.
Now, via the REPO operations the NBR inject liquidity in the economy and ultimately increasing the money supply (I showed you this here as both M1 and EURRON went up lately). BUT, as the REPO maturity is only 7 days unless the NBR repeates the operation every 7 days the money supply will not change.
Therefore, if we take out from the OD the average amount of REPO for the last months we should see what has happened to the banks’ funds at the NBR. Well, as you can se it fell, meaning that the money supply fell. This result also explains why banks need more and more liquidity from the NBR: because they have swapped some of it to EUR and sent it overseas.