Borrowing under LAF highest in FY13

Market hopes for Open Market Operations purchase of gilts and govt spending

Following the advance tax outflow from the system, borrowing by banks under the Reserve Bank of India's (RBI) daily Liquidity Adjustment Facility (LAF) rose to the highest level this fiscal on Tuesday to Rs 1,51,770 crore compared with a daily average borrowing of over Rs 1,00,000 crore in the last one month. This level is far above the RBI's comfort zone of +/- 1% of banks’ Net Demand and Time Liabilities (NDTL).

“Normally tax outflows go out of the system three days after December 15. Today the tax outflow money would have gone out of the system due to which the borrowings rose,” said J Moses Harding, head - ALCO and economic and market research, IndusInd Bank. As per estimates the advance tax outflows had drained about Rs 50,000-60,000 crore liquidity from the system.

The RBI maintained a status quo on key policy rates as well as the Cash Reserve Ratio (CRR) on Tuesday in its mid-quarter monetary policy review. CRR is the proportion of total deposits a bank has to keep with RBI as cash and currently it stands at 4.25% of banks of Net Demand and Time Liabilities (NDTL). At the start of 2012 it stood at 6% and it was brought down to current level in four tranches.

The RBI did not cut banks' CRR on Tuesday as liquidity tightness was due to slow government spending, Subir Gokarn, deputy governor, RBI said in Mumbai.

The RBI has conducted two Open Market Operations (OMOs) purchase of gilts this month to comfort the liquidity. The RBI infused Rs 23,246 crore by way of OMOs in December. There are expectations of more OMOs.  According to Anoop Verma, vice president, Development Credit Bank the RBI should infused liquidity by way of Open Market Operations (OMOs) purchase of gilts and there should be government spending.

The hopes were granted as the RBI announced OMOs worth Rs 8,000 crore on Friday. The announcement came after the market hours. Even Gokarn said in Mumbai on Tuesday that the central bank will buy bonds through open market operations going forward, if needed. As per market estimates, OMOs up to Rs 50,000 crore is in store for the rest of the fiscal.

However, according to S Srinivasaraghavan, executive vice president and head- treasury of Dhanlaxmi Bank the announcement of OMO will just help to improve market sentiments a tad. This is because on Friday the RBI will also auction gilts worth Rs 12,000 crore. 

Hopes of a further cut in the CRR are also expected. “The possibility of a 25 basis points CRR cut in fourth quarter of FY13 still remains, especially if the government surprises with additional market borrowings,” said Abheek Barua, chief economist, HDFC Bank. But according to Barua OMO buybacks could, however, remain the preferred liquidity easing tool for now, extending the recent softening in gilt yields further.

The 10-year benchmark gilt 8.15% 2022 closed at 8.15% on Tuesday compared with previous close of 8.14%. “Since there was no cut in CRR, the yield rose marginally,” said Srinivasaraghavan. For the next one week Srinivasaraghavan expects the yield on the 10-year benchmark gilt to trade in the range of 8.12-8.17%.