Liquidity crunch to persist longer

Liquidity conditions are set to worsen in the coming week as the drawdown from RBI’s repo window is expected to touch the Rs 1 lakh crore level again.

“The drawdown from the repo window may touch Rs 1 lakh crore again on Monday, owing to the start of a new reporting fortnight,” said R V S Sridhar, head-global markets, Axis Bank. Banks usually tend to fund their regulatory requirements in the first week of the reporting fortnight.

Despite it being a reporting Friday on February 11, banks borrowed over Rs 80,000 crore from RBI at the repo rate of 6.5 per cent. “Banks anticipated liquidity may return to the system and they would be able to cover the shortfall at lower rates,” said C Rajendran, head of treasury, Corporation Bank.

For nearly three months the liquidity deficit has been close to Rs 1 lakh crore, way out of RBI’s comfort zone of 1 per cent of Net Demand and Time Liabilities or Rs 50,000 crore.

In March, a fresh round of advance tax outflows could again put pressure on the fund position of banks.

Currently, the second liquidity adjustment facility and a leeway of 1 per cent on the statutory liquidity ratio are available to banks as support from RBI.

Market participants expect liquidity to improve only after a couple of months, subject to increased government spending. In its third quarter review of monetary policy, RBI had said above-normal government cash balances had contributed to the frictional component of the liquidity deficit.

On the other hand, the widening gap between credit and deposit growth rates led to a structural liquidity deficit.