Liquidity deficit more than double RBI's comfort level

The liquidity deficit in the banking system continues to remain above the central bank’s comfort level, despite a 75-basis point cut in the cash reserve ratio (CRR), which came into effect on Monday.

Banks on Monday borrowed Rs 1.3 lakh crore from the reserve bank of India (RBI)’s repo window. This was more than double RBI’s comfort level, which is +/- 1 per cent of net demand and time liabilities, or Rs 60,000 crore.

The central bank’s CRR cut announced on Friday is expected to unlock Rs 48,000 crore of primary liquidity into the banking system. The move was aimed at enabling banks to tide over the possibility of an acute liquidity shortage due to the corporate advance tax outflow, estimated at around Rs 60,000 crore.

Market participants say the liquidity deficit may continue through March, as banks would need resources to meet quarterly targets. The situation is expected to improve in April.

Vivek Rajpal of Nomura Securities said, “The government usually spends a large amount in the beginning of April, making its balances with RBI negative. With this seasonality in place, it is likely the government would record negative balances of Rs 40,000 crore in April, which effectively means average LAF (liquidity adjustment facility) borrowing would be around Rs 30,000 crore to Rs 40,000 crore, assuming no forex intervention.”

Banks’ demand for cash also made short-term rates sticky, with rates on three-month certificates of deposit (CDs) at around 11 per cent. According to dealers, while Allahabad Bank raised three-month CDs at 11.10 per cent, ING Vysya Bank raised these at 11.44 per cent. The lack of appetite among investors also led to the rates staying high, said dealers.