Banks prefer call market to LAF

Amid tight liquidity, no bids for first reverse repo auction.

For the first time in over three-and-a-half months, banks did not park any funds with the Reserve Bank of India during the first round of liquidity adjustment facility (LAF) operations this morning.

Instead, many of them are said to have deployed funds in the call market and collateralised borrowing and lending operations segment as the rates were higher this morning than the 3.50 per cent reverse repo rate paid by RBI.

However, nine of them participated in the second round of auction to put Rs 16,015 crore through the reverse repo route. But liquidity was comfortable, which was evident from the fact that none of the banks approached RBI to tap the repo window to access funds. This is the lowest since the special three-day auction on February 21 when banks used the reverse repo route to put Rs 6,855 crore with the central bank.
 

THEN & NOW Liquidity & call rates after advance tax payments
2008-09	Repo	Reverse repo	Call rate*
16-Jun	5,620	–	8.07
17-Jun	5,015	–	8.10
18-Jun	6,270	–	8.04
15-Oct	55,340	.–	10.04
16-Oct	10400	6270	6.94
17-Oct	7,350	5,715	6.60
15-Dec	2,300	35,670	6.17
16-Dec	7,375	31,595	6.48
17-Dec	7,125	19,135	6.54
16-Mar	–	22,755	4.08
17-Mar	–	16,015	4.33
* Weighted average rate in % Repo: Amount raised by banks from RBI in Rs crore Reverse Repo: Surplus funds parked by banks with RBI in Rs cr Source: RBI and CCIL

Yesterday, banks had parked Rs 22,755 crore through the reverse repo route, with Rs 5,000 crore coming through the morning operation. RBI has been conducting two LAF sessions for some time now. The last instance of banks not using one of the two LAF sessions to park surplus funds was on November 28 when no bids were submitted during the morning auction. However, in the second session, Rs 7,710 crore was parked with RBI. At the same time, banks had also used the repo route to access Rs 12,250 crore. So, on a net basis, banks borrowed Rs 4,540 crore from RBI.

Dealers said that the advance tax payments had sucked out liquidity from the system. Besides, there was demand from banks to meet their fund requirements ahead of the reporting on Friday. Typically, banks frontload their borrowings during the first few days of the weeks to meet the reporting requirements. “The tax outflow is now taking effect as money went out of the system on Friday, Saturday and Monday. So, there was some tightness. May be Rs 30,000 crore to Rs 35,000 crore went out to meet the tax payment requirements,” said a dealer.

“The system still has some surplus (liquidity), but some banks may have had an issue. It seems there were more borrowers in the market today than we have seen in recent weeks,” added another dealer.

With funds going out of the system, there was some pressure on call rates, which opened at 4.30 per cent this morning and touched a high of 4.55 per cent. According to data on the Clearing Corporation of India website, the weighted average for the day was 4.33 per cent, as against 4.08 per cent yesterday.

“But there were very few banks which could have done that because of counter party rules,” said a banker.

While rates were higher today, the volumes were lower at Rs 19,645 crore, as against Rs 21,120 crore yesterday. In the segment open for participation from mutual funds, insurance firms and primary dealers, volumes touched a new high of Rs 74,993.70 crore.

With the government expected to release funds ahead of the financial year’s end on March 31, bankers expected liquidity to improve over the next few days. Since October, RBI has taken several measures to inject over Rs 3,88,000 crore into the system, with the 400-basis point reduction the cash reserve ratio releasing Rs 1,60,000 crore into the system.

Usually, after the payment of advance tax by companies, liquidity comes under strain.