Record bank borrowings on advance tax outflow

Banks borrow at 10.25% from MSF as compared to 7.25 in liquidity adjustment facility

Bank borrowings under the Reserve Bank of India (RBI)’s marginal standing facility (MSF) are at an all-time high, breaching the Rs 1-lakh-crore mark, owing to advance tax outflow from the system and arbitrage opportunities availed of by banks.

Banks borrow at 10.25 per cent under the MSF window, against 7.25 per cent under the liquidity adjustment facility (LAF). RBI has capped LAF borrowing at 0.5 per cent of banks’ net demand and time liabilities, and this has forced banks to take the MSF route. The cap, introduced on July 15, was aimed at making rupee liquidity expensive to curb speculation in the foreign exchange market.

RBI data show banks borrowed Rs 1.17 lakh crore on Friday and Rs 1.43 lakh crore on Monday. According to Street estimates, the outflow stood at Rs 50,000-60,000 crore. Borrowings under the LAF window stood at Rs 38,982 crore and Rs 39,920 crore on Friday and Monday, respectively.

“Banks borrowed about Rs 1 lakh crore from the MSF window, due to outflows on account of advance tax. The borrowings would come down once government spending flows back into the system,” said S Srinivasaraghavan, head of treasury at Dhanlaxmi Bank.

Earlier this year, the MSF rate was raised by 200 basis points to tighten liquidity and arrest the rupee’s volatility. However, volatility in the rupee continues and short-term rates continue to be in double digits.

In the inter-bank money market, the weighted average call money rate stood at 10.5 per cent on Tuesday, against 10.47 per cent on Monday. The weighted average rate of collateralised borrowing and lending obligation was 10.25 per cent on Tuesday, compared with 10.32 per cent on Monday.

According to Street estimates, the rates may continue in double digits till RBI rolls back its liquidity-tightening measures.