Bond redemptions help banks turn net borrowers after two months

More easing expected next week as govt begins spending, says Subbarao.

The tide seems to have turned, with banks today becoming depositors, on a net basis, at the Reserve Bank of India’s liquidity adjustment facility (LAF) window.

It is for the first time in two months that banks parked more funds through the reverse repo window, used to mop excess cash in the system, than accessing money through repo to tide over tight liquidity.

According to data on the RBI website, on a net basis, banks parked Rs 3,520 crore through the reverse repo window. They parked Rs 5,775 crore with RBI, while borrowing Rs 2,255 crore.

In June, when liquidity stress was at a peak, banks borrowed as much as Rs 83,000 crore from the repo window on a single day, June 24.

Traders said the redemption of Rs 32,200 crore of government securities eased cash conditions today, but it was insufficient to create a liquidity surplus.

“The shortage has come down, mainly helped by the bond redemption. But banks are still depending upon the central bank for their daily needs,” said a dealer with a public sector bank.

On Tuesday, RBI raised the reverse repo rate by 50 basis points and the repo rate by 25 basis points. The central bank had infused Rs 42,465 crore through its two tenders yesterday.

The last time banks parked funds at the central bank’s LAF window was May 28, of Rs 6,200 crore. Since then, the rush by telecom and broadband service providers to pay spectrum charges of Rs 106,000 crore had drained liquidity from the system. In addition, advance tax payments also put pressure and cash, available in abundance for nearly 15 months, disappeared from bank treasuries, forcing them to tap the repo route.

The central bank had, however, assured banks that liquidity would be back, though not in surplus, as the government started spending.

“We expect that the systemic liquidity will be more in the deficit mode than the surplus mode, going forward. However, we will see that there could be ... on days a marginal surplus. Over the last couple of weeks, the liquidity situation has eased from the extreme tightness,” RBI Governor D Subbarao said during a teleconference with analysts and researchers today.

“On June 24 was the maximum injection of liquidity, of 83,000 crore, but since then there has been substantial easing and we expect further easing in the next week or so as government starts spending. There will be salary disbursements, some redemption of bonds and some expenditure by the government... but it will not be back to the surplus situation,” Subbarao said.

10-year bond yields at 3-month high
The 10-year bond yields climbed to the highest level in almost three months on concern that the central bank will keep raising borrowing costs to curb inflation, adding to the four increases this year.

The yield on the 7.8 per cent note due in May 2020 climbed three basis points, or 0.03 percentage point, to 7.75 per cent as of the 5:30 pm close in Mumbai, according to RBI’s trading system. That was the highest level since May 3. The price fell Rs 0.19, or 19 paise per Rs 100 face amount, to Rs 100.32.

Call rate ends off highs
Interbank call money rate ended off the day’s high of 5.65 per cent today because demand tapered off towards the end of trade, dealers said. The one-day call rate ended at 4.6-4.75 per cent, unchanged from yesterday’s close. Collateralised Borrowing and Lending Obligations (CBLOs) ended at a weighted average rate of 4.88 per cent, as against 5.17 per cent yesterday.

Rupee falls from a one-week high
The rupee fell from near a one-week high on speculation local companies stepped up imports to take advantage of a decline in global commodity prices, boosting demand for foreign exchange. The currency declined 0.2 per cent to 46.77 per dollar as of the 5 pm close in Mumbai. It yesterday strengthened 0.8 per cent, the most in five weeks, and touched a one-week high of Rs 46.64 as RBI raised its benchmark reverse-repurchase rate by half a percentage point to 4.5 per cent.