Banks turn net borrowers

May withdraw funds parked with MFs, as liquidity is expected to tighten further.

After over two months, banks today turned net borrowers during the Reserve Bank of India’s (RBI’s) liquidity adjustment facility (LAF) operations, as payment of Rs 68,000 crore for 3G spectrum fee drained out cash from the system.

Tightness was visible in money markets too, with call rates touching a high of 5.30 per cent. The rates in the collateralised borrowing and lending obligation (CBLO) market, which is also accessed by bond houses, insurance companies, non-banking finance companies and mutual funds (MFs), also reached a high of 5.50 per cent. The weighted average call rate was 4.99 per cent today, compared with 3.68 per cent on Saturday.
 

THE SQUEEZE IS ON

DateAmount parked via
 reverse repoCall
 amountCall
rate 21-May47,5301392.50-3.85 24-May4,54012,5412.50-4.20 25-May8,8908,4332.50-4.20 26-May5,6858,8792.50-4.20 28-May6,2153522.75-4.30 31-May-3,71011,5502.80-5.30 On May 31, banks raised funds via the repo route and were net borrowers
Amount in Rs cr, rate in %                         Source: RBI, Clearing Corporation

Volumes shot up to Rs 11,550 crore in the call market, while in the CBLO space, volumes were estimated at Rs 45,754 crore, according to data on the Clearing Corporation of India website.

During the two LAF operations, banks used the repo window to access Rs 3,710 crore on a net basis. Cumulatively, five banks accessed Rs 4,250 crore through the repo route, which makes overnight funds available at 5.25 per cent. At the same time, there were seven bids to park

Rs 540 crore surplus cash through the reverse repo window, which is used by the central bank to mop up surplus cash from the system. The last time banks were net borrowers at the LAF window was on March 29, when they availed of Rs 455 crore.

Apart from 3G payments, banks are bracing for more demand from companies.

Dealers expect liquidity to tighten further. “The pressure will actually start from tomorrow. In addition, there will be demand for payments of around Rs 40,000 crore for wi-max (for which auction is currently underway) and another Rs 22,000 crore to Rs 25,000 crore due to advance tax (June 15 is the deadline). So, the situation will remain tight for some more time,” said Mahesh Pai, head of treasury at Canara Bank.

“Tightness will be there for a month or so, depending on the government’s expenditure pattern. But, having said that, there is a lot of liquidity from the RBI side. The measures already announced should help,” said HDFC Bank Treasurer Ashish Parthasarathy.

Other dealers said the situation would worsen from tomorrow, as money would actually go out of the system. “What we saw today was banks preparing for the payment. Many payments have not been made, only instructions or pay orders have been issued. The actual payment will happen tomorrow or the day after,” said a banker.

Bankers also said MFs would be in the market in a couple of days to offload papers, as banks would look to withdraw some of the funds parked with MF schemes. As on May 7, banks had parked Rs 1,12,000 crore in various mutual fund instruments.

To deal with the demand for funds from companies, RBI has virtually lowered the statutory liquidity ratio floor by 0.50 per cent from the prescribed level of 25 per cent for banks. In addition, it is now conducting two LAF operations during the day.

Besides, the size of the treasury bill auction for June has been reduced by Rs 22,000 crore to Rs 15,000 crore, as the government will depend on funds from 3G fee and advance tax payments to meet its spending needs.