LAF enters positive territory

In a sign of easing liquidity, banks parked their excess money with the Reserve Bank of India (RBI) on the first day of market transaction in the new financial year (2011-12).

Banks stored Rs 43,645 crore in the reverse repo (the rate at which RBI borrows money from banks) window under the Liquidity Adjustment Facility (LAF) and borrowed Rs 11,135 crore from the repo (the rate at which banks borrow money from RBI) window, thus indicating an improvement in liquidity. Net LAF entered positive territory after nearly seven months.

As banks resorted to heavy borrowing to meet yearly regulatory requirements, the repo drawdown from LAF touched Rs 1.4 lakh crore in the last week of 2010-11. “This is certainly the excess money that banks had borrowed during the year-end. This indicates liquidity has eased out and will improve further,” said a treasury official with a public sector bank. He said repo borrowings would be low and liquidity could go into a surplus mode if credit growth did not match the deposits taken by banks.

RBI had earlier said it preferred liquidity in the deficit mode, as this facilitated quicker policy actions. The apex bank considers 1 per cent +/- of net demand and time liabilities as its comfort zone. Liquidity was over the RBI’s comfort level since October, 2010. Currently, banks enjoy a leeway of 1 per cent in the Statutory Liquidity Ratio and a second LAF every day, available till April 8.

According to RBI rules, to maintain Statutory Liquidity Ratio, banks have to invest up to 25 per cent of their net demand and time liabilities in government securities. Failure to do so would invite penal action.