Govt, RBI discuss liquidity crunch

The government and the Reserve Bank of India (RBI) on Tuesday discussed steps to deal with the current cash crunch in the system.

Though RBI Deputy Governor Subir Gokarn met Finance Secretary Ashok Chawla to discuss the G-20 meeting in Toronto later this month, the liquidity situation also came up. The meeting lasted nearly 30 minutes.

After the meeting, which was also attended by officials from the finance ministry’s budget division, Gokarn declined to comment on either liquidity or inflation. The details of the steps that were discussed could not be ascertained.

The liquidity in the banking system has become tight due to payment of Rs 68,000 crore by telecom companies for third-generation spectrum. For nearly three weeks at a stretch, banks have been net borrowers during liquidity adjustment operations (LAF) by RBI. In contrast, during the first half of May, banks, on an average, daily parked over Rs 40,000 crore surplus cash with RBI.

Though RBI has taken steps to deal with the crunch, banks say these are essentially enabling provisions through which they can borrow extra cash. In addition, the size of the treasury bill auction during June has been scaled down from Rs 37,000 crore to Rs 15,000 crore in view of the higher-than-expected inflows into the government’s coffers.

Over the next few days, the situation is going to worsen, with companies due to pay Rs 38,000 crore for broadband wireless access spectrum, while another Rs 30,000 crore is expected to flow out due to advance tax payments.

On Tuesday, on a net basis, banks raised over Rs 14,000 crore through the repo window during the first LAF operation, according to RBI data. During the second operation, another Rs 23,870 crore was accessed, taking the net use of the repo window to nearly Rs 38,000 crore on Tuesday, as against Rs 41,220 crore yesterday.

In the call money market, where overall volumes were Rs 8,000 crore, rates hovered in the 2.9-5.4 per cent band, with the weighted average rate estimated at 5.26 per cent, compared to 5.19 per cent yesterday. The situation was similar in the collateralised borrowing and lending segment, with weighted average rate at 5.25 per cent, compared to 5.23 per cent yesterday. According to data on Clearing Corporation of India’s website, volumes in this market, which is also accessed by bond houses, insurers and non-banking finance companies, were estimated at Rs 41,382 crore, as against Rs 40,847 crore yesterday.

The situation is expected to improve once the government starts releasing the Rs 135,000 crore that it would have mopped up by the end of the month. The initial tranche of inflows, and funds raised through two sets of cash management bills, have helped the government wipe out its ways and means advances, which had crossed the Rs 30,000-crore mark. It has, however, not altered its borrowing calendar so far and yesterday said it would raise Rs 11,000 crore by auctioning securities this week.