Advance tax payment sucks out liquidity

Banks on Monday parked Rs 4,230 crore through the Reserve Bank of India’s (RBI’s) reverse repo window as payment of the fourth installment of advance tax sucked out liquidity from the system.

As a result, call rates touched a high of 4 per cent during the day, though they later eased to 2.50 per cent. The weighted average call rate was 3.72 per cent, compared with 3.22 per cent on Saturday, according to data on the Clearing Corporation of India website.

What added to the pressure was the rush to demand from banks, which wanted to keep adequate funds in the first week of the reporting fortnight.

Bankers said liquidity would tighten further when the market opened on Wednesday as advance tax-related funding would move out of the banking system. Rates are expected to remain around the same level on Wednesday.

A banker said that in the morning, rates were higher as banks wanted to ensure that they had adequate funds in the early part of the day. “No one wants to take any chances. So, when they realised that they had enough funds, the pressure eased and (call) rates fell in the afternoon,” said an executive with a foreign bank.

According to data from Clearing Corporation of India, the volume in the call money market stood at Rs 10,329 crore, as against Rs 680 crore on Saturday, when trade is low. In Collateralised Borrowing and Lending Obligation (CBLO), a secured form of money market lending, volumes were estimated at Rs 74,496 crore, compared to Saturday’s figure of Rs 6,600 crore. Here, the overnight rate touched a high of 3.85 per cent. The weighted average rate was 3.38 per cent, as against 3.24 per cent on Saturday.

Companies make payments towards quarterly advance taxes in anticipation of their profits at year-end, temporarily draining funds from the banking system. Dealers said the money should be back into the system in about 15 days.

Advance tax payment by the top 100 companies in the Mumbai region is estimated to have gone up by around 3.6 per cent to Rs 11,625 crore in the fourth quarter. The region accounts for nearly 40 per cent of the total direct tax collections.

With banks pushing their managers to meet year-end lending targets, liquidity is expected to remain tight during the second half of the month.