Liquidity may come under strain

Tax payment, bank credit, NMDC issue to suck out cash over next three weeks.

The banking system is flush with liquidity, but the next three weeks will test the market with large amounts expected to flow out towards the payment of advance tax and lending by banks.

While the situation may not be different from the last fortnight of any financial year, there is a third factor at play this year — the NMDC public issue. The issue can mop up over Rs 11,600 crore from the system, though a higher amount could be pre-empted if the offer is over-subscribed. The issue opens for subscription tomorrow.

The last large issue — Reliance Power’s Rs 10,260-crore initial public offer (IPO) two years ago — had resulted in a cash crunch, as the issue was subscribed 72 times. Bankers said the problem was accentuated by the problems faced by foreign institutional investors in their home markets.

Apart from the NMDC issue, there are qualified institutional placements (QIPs) underway or in the pipeline by companies such as Exide Industries, India Cements and Alok Industries. Further, IL&FS Transportation and DQ Entertainment are raising funds through IPOs.

Advance tax payment is estimated to be in the range of Rs 40,000-50,000 crore, though companies will get the benefit of adjusting the amount they had paid on account of fringe benefit tax before it was abolished.

But, fund managers are not nervous, saying the system has ample liquidity. For instance, banks today parked Rs 80,100 crore through the Reserve Bank of India’s reverse repo window (see table).

Further, they had parked over Rs 120,000 crore with mutual funds in the absence of any lending. Typically, at the end of a quarter, banks withdraw this money to reduce their holdings. Ashish Kumar, fund manager with LIC Mutual Fund, said this quarter would be no different, as banks would try to avoid attracting capital charge. In addition, they have the option to tap the repo route, in case they need to meet their liquidity needs.

The call money market is another place to raise funds. Call rates have remained close to the reverse repo rate of 3.25 per cent. Any rise in demand for funds will be reflected in the rise in interest rate in this market. There was enough money with players, hence the rates were expected to remain at current levels in near future, dealers said.

A senior State Bank of India executive said there would be enough resources in the system. His bank was complaining about fewer avenues to deploy the excess Rs 75,000 crore it had till a few weeks ago.

The effect of money moving out of the system due to advance tax payments would be felt next week around March 18, bankers said.

M Sarraf, treasury head at Dhanlaxmi Bank, said the way the market has seen aggressive fund-raising activity in last few weeks, there was an impression that there could be tight liquidity conditions ahead. “But, it is just a surface level trend. There is enough resources within the system to cope with events like advance tax payments and public offerings,” he added.