Liquidity to tighten as advance tax deadline nears

Situation will result in banks borrowing more from RBI's Liquidity Adjustment Facility and Marginal Standing Facility

Liquidity in the system is set to again get tighter, with the deadline approaching for payment of the third instalment of corporate advance tax.

The tightness will result in banks borrowing more from the Reserve Bank of India's Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF).

Banks borrowed Rs 20,009 crore under the repo auction on Monday. Last week’s daily average borrowing from the LAF was about Rs 2,000 crore.

In the recent past, liquidity had got a boost because banks converted the funds raised from RBI's special dollar swap window  and foreign borrowings into rupees. RBI stated last week that the swap windows for Foreign Currency Non-Resident (Banks) or FCNR(B) funds and banks' foreign borrowings had mobilised $34 billion. The two facilities were closed on November 30. Due to the comfortable liquidity, overnight rates had also dropped.

“The advance tax outflow will be Rs 60,000-70,000 crore. Due to this, borrowing under the LAF and MSF will rise. Overnight rates will also go up but will be in the range of 7.75-8.75 per cent,” said S Srinivasaraghavan, head of treasury at Dhanlaxmi Bank.

Some experts say liquidity will also tighten due to the government's Rs 50,000-crore debt switch programme. Under this, the government will buy short-dated debt maturing in financial years 2014-15, 2015-16 and 2016-17, selling longer-dated bonds to the markets.

“The debt switch programme will put additional pressure on liquidity, due to which even government bond yields will rise. This debt switch will happen most likely in the near future. The new 10-year benchmark government yields might soon trade towards nine per cent. The outlook for the bond market is murky,” said Anoop Verma, vice- president (treasury), Development Credit Bank.

The yield on the 10-year benchmark government bond 8.83 per cent 2023 ended at 8.90 per cent on Monday, compared with 8.85 per cent on Friday.

According to traders, foreign banks and private sector banks will be affected more due to this debt switch programme, as they mostly deal in short-term securities. The weighted average rate of call money was 7.77 per cent on Monday, compared with Friday's 7.57 per cent. The weighted average Collateralised Borrowing and Lending Obligation was at 7.75 per cent, compared with 7.67 per cent on Friday.