Advance tax payments may add to liquidity woes

With new boss in charge, RBI may unwind some of the liquidity squeeze steps to ease the pressure

A strong demand for money to pay the second tranche of advance tax by September 15 may put further pressure on liquidity.

Given the pain on corporate balance sheets due to the sluggish economic growth, the tax outgo may be subdued, treasury executives said. Yet demand for additional funds from corporations would exert pressure on the already tight liquidity conditions. The tax outgo is pegged just over Rs 50,000 crore.

A senior State Bank of India official said liquidity would be under strain for a few days in the run-up to tax payment date. The cost of funds will be high this time due to steps taken by the Reserve Bank of India (RBI) to keep liquidity under tight leash.

Suspecting part of liquidity was being used to speculate in the rupee-dollar market, RBI began to put curb on bank borrowing through the overnight borrowing window to stem the rupee fall.

G Chokkalingam, managing director and chief investment officer with Centrum Wealth Management, said overall liquidity in the market was under pressure. As corporations seek funds from banks for tax payments, the liquidity could tighten further. Banks would borrow from the money market to arrange for funds, pushing up short-term money market rates further.

Bank borrowings from RBI – liquidity adjustment facility (LAF) and marginal standing facility (MSF) – have been on rise. The combined borrowing by banks was Rs 90,719 crore on September 2, 2013, according to RBI data.

The overnight rates are at present ruling around (10.25 per cent), a rate at which RBI is dispensing overnight money to banks under MSF.

A treasury head with a Mumbai-based public sector bank said while corporate demand would add to pressure on liquidity, some government bonds were maturing up to September 10. This should bring in fresh funds in the system, marginally improving the supply of money. Plus, the cash management bills to the extent of Rs 45,000 crore are being redeemed in the third week.

There is expectation that under the leadership of the new governor, RBI may unwind some of the liquidity squeeze steps to ease the pressure, bankers said.