Despite the Reserve Bank of India (RBI) conducting open market purchase of gilts, liquidity has worsened.
Banks borrowed as much as Rs 1,46,290 crore under the RBI’s daily Liquidity Adjustment Facility (LAF) on Monday, the highest this financial year. In the past month, the borrowing has been above Rs 1 lakh crore, far above RBI’s comfort zone of +/- 1 per cent of banks’ net demand and time liabilities (NDTL).
The high borrowing is due to the advance tax outflow, said Parthasarathi Mukherjee, president (treasury and international banking), Axis Bank. December 15 was the deadline for the third instalment of corporate advance tax. According to estimates, the outflows had drained liquidity worth about Rs 50,000 crore to Rs 60,000 crore from the system.
Another factor contributing to the high borrowing is that a new reporting fortnight began on Saturday, due to which banks were borrowing to meet their cash reserve ratio (CRR) requirements, said S Srinivasaraghavan, executive vice-president and head of treasury at Dhanlaxmi Bank.
Government spending, which normally happens after the tax collection is over, is yet to come, he added.
CRR is the proportion of total deposits a bank has to keep with RBI as cash. It is now 4.25 per cent of NDTL. At the start of 2012, it stood at six per cent; it was brought down in four tranches.
However, the Street feels borrowings by banks under LAF may ease a tad.
“I am anticipating significant government spending coming up soon, due to which I see this as a temporary phenomenon,” said Mukherjee.
The market is also hoping for more open market operations (OMOs). RBI conducted two purchases of gilts this month, to infuse Rs 23,246 crore.
However, according to Srinivasaraghavan, despite government spending and OMOs, daily average borrowings will continue to be above Rs 1 lakh crore unless there is a 50 basis points (bps) cut in CRR tomorrow, when RBI reviews the monetary policy.
The Street is divided on whether RBI will go for a CRR cut. While some analysts said they expect status quo on CRR as well as the repo rate, others expected a rate cut. “We expect RBI to cut the repo rate by 25 bps,” said Tushar Poddar, managing director and chief India economist, Goldman Sachs India.