CP rates increase on tight liquidity

The liquidity deficit in the system continues to be above Rs 1 lakh crore daily and this has resulted in commercial paper (CP) rates climbing up. In the past fortnight, CP rates have gone up by 50-80 basis points, as the daily average liquidity deficit in the system has been close to Rs 95,000 crore and there are expectations of it tightening further.

“The issuers are taking a view that the liquidity tightness in the system will remain. The government spending might not be significant. In March, there will be advance tax outflows and redemptions, due to which liquidity will tighten. In such a scenario, CP rates will inch up further,” said Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund.

According to issue arrangers, HDFC today raised one-month CP for 8.25 per cent and if these would have been raised yesterday, it would have been possible to do so at 8.18 per cent. Today, banks borrowed Rs 126,935 crore from the Reserve Bank of India’s repo window, compared with Rs 123,950 crore yesterday.

RBI had, after market hours yesterday, announced an open market operation (OMO), for purchase of gilts worth Rs 10,000 crore. However, the pressure on liquidity continues, as government spending has slowed. Though the government has completed a little over 90 per cent of its borrowing schedule for the year, spending has not kept pace.

“If the LAF (RBI’s liquidity adjustment facility) borrowing is going to continue this way, even next week I am expecting an OMO announcement,” said

S Srinivasaraghavan, executive vice-president and head-treasury of Dhanlaxmi Bank.

To ease liquidity, RBI in its third-quarter monetary policy review on January 29 had cut banks’ cash reserve ratio by 25 basis points to four per cent of their net demand and time liabilities, effective the fortnight beginning Saturday.

Yet, the scenario seems set to worsen. “Given the advance tax outflows on March 15, banking system liquidity is expected to worsen. In addition, we expect currency demand to withdraw another Rs 20,000 crore from the banking system between now and March. Overall, the banking system liquidity deficit is expected to worsen in March. In anticipation of this, we expect RBI to conduct two or three more OMO between now and March,” said Vivek Rajpal of Nomura.