Liquidity deficit hits record high

Short-term rate eases, but one-year rates harden.

Despite the Reserve Bank of India’s (RBI’s) recent policy measures, the liquidity deficit in the system hit record high on Monday, with banks borrowing nearly Rs 1.6 lakh crore from the repo window.

The apex bank’s efforts to ease liquidity have manged to soften short-term rates, but both one-year bulk deposit and one-year certificate of deposit (CD) rates have risen.

Bankers said borrowing from the central bank soured as banks rushed for funds to meet their reserve requirements early in the new reporting fortnight.

According to dealers, Canara Bank raised one-year bulk deposits at 9.67 per cent on Monday, while one-year CD rates hovered around 9.5 per cent.

Syndicate Bank raised Rs 175 crore through one-year CDs at 9.5 per cent, while Punjab & Sind (P&S) Bank raised Rs 100 crore at 9.6 per cent. P&S Bank is among the few state-run bank that has low current and savings account deposits. State Bank of Patiala and State Bank of Travancore raised Rs 300 crore and Rs 200 crore, respectively, at 9.4 per cent through similar instruments.

Rates for three-month CDs have fallen to 8.75 per cent from 9.1-9.2 per cent a week back, according to dealers. Central Bank of India and Indian Overseas Bank raised Rs 200 crore and Rs 450 crore, respectively, through three-month CDs at 8.75 per cent.

Last week, the central bank announced buyback of government bonds worth Rs 48,000 crore in one month through open market operations to ease liquidity. RBI also reduced the statutory liquidity ratio (SLR) to 24 per cent from 25 per cent. The reduction in SLR is expected to release of Rs 50,000 crore into the system.

“While the liquidity deficit improved transmission of monetary policy signals, with several banks raising deposit and lending interest rates, excessive deficit induces unpredictability in both availability and cost of funds, making it difficult for the banking system to sustain credit delivery,” RBI said in its mid-quarter review of monetary policy on December 16.

Though the central bank has infused funds into the system, it has expressed concern over inflation, as global commodity prices are on a rise.

“As the economy expands, it needs primary liquidity, which will have to be provided in a manner consistent with the monetary policy stance. Such provision of liquidity should not be construed as a change in the monetary policy stance, since inflation continues to remain a major concern,” the central bank had said.