Liquity to stay tight as banks rush to shore up reserves

Bank borrowings expected to fall after monetary policy on Tuesday

Bank borrowings are expected to stay well above Rs 1 lakh crore for another couple of days and fall only after the monetary policy announcement on Tuesday. The reason, say market players, is that banks are rushing to stock up cash on expectation the Reserve Bank of India (RBI) will raise rates, making funds expensive.

“Next week, bank borrowings will come down drastically and the average daily borrowing for the fortnight will be much less than Rs 1 lakh crore,” said Anjan Barua, deputy managing director, State Bank of India.

Banks have been borrowing more than Rs 1 lakh crore since January 17 to meet their reserve obligations with RBI. The drawdown from the repo window today was Rs 1,12,205 crore in twin liquidity adjustment facility (LAF) operations.

January 17 was the start of a new reporting fortnight (ending January 28). Banks are supposed to park a slice of their reserves with RBI every fortnight.

RBI will announce its third quarter monetary on January 25. It is widely expected to raise policy rates by 25-50 basis points, making it expensive for banks to borrow from RBI. Therefore, banks are rushing to avail of funds for the running fortnight at existing rates.

At present, banks are borrowing funds from RBI at the repo rate of 6.25 per cent, which is expected to go up to 6.50 per cent or 6.75 per cent from Tuesday. After the policy, the drawdown is expected to fall as banks would have already raised the necessary funds.

The daily average liquidity crunch was around Rs 1 lakh crore in December 2010. To ease the pressure, RBI reduced the statutory liquidity ratio (SLR) from 25 per cent to 24 per cent so that banks can use their securities to avail of funds from RBI. Also, the second LAF facility was extended to January 28.

RBI’s four open market operations could infuse around Rs 37,067 crore as against the notified amount of Rs 48,000 crore.

These steps helped bring down the deficit levels to Rs 80,000 crore in first fortnight of January. However, the deficit still remains above the banking regulator’s comfort zone, that is, Rs 50,000 crore, or +/- 1 per cent of the net demand and time liabilities.

Going forward, higher government spending is also expected to improve liquidity.

The tight liquidity has also led banks to raise deposit rates two to three times since October 2010. Rates on fixed deposits have gone up by almost 250 basis points in the period. Banks say deposit rates can go up even further if needed. “We may go for another round of increase if liquidity does not improve,” said an official of a large public sector bank.