Short-term rates back to double digits on tight liquidity

After some relief, rates on short-term debt instruments have crossed 10 per cent levels within a month as liquidity pressures have not eased despite inflows. Heavy weekly government borrowing and central bank’s foreign exchange market intervention continue to weigh on liquidity in the system.

Last week, Indian banks raised Rs 450-500 crore via certificates of deposits (CDs). Rates on one-year CDs are at 10 per cent and three-month CDs at 9.8 per cent. After the year-end pressure, rates for one-year CDs had eased to 9.5 per cent and three-months to nine per cent in mid-April. Rates on commercial papers (CPs) have also increased to more than 10 per cent from 9.7 per cent levels in the same period. CDs are debt instruments issued to raise funds for tenures of up to one year, while CPs are issued by companies for similar maturities. Mutual funds and banks are the major investors in both these instruments.

Liquidity for the week remained in the range of a negative Rs 1.12-1.25 lakh crore, as reflected by bank borrowings from the liquidity adjustment facility window of the Reserve Bank of India (RBI). Banks also borrowed Rs 800 crore from the marginal standing facility (MSF), at a penal rate of nine per cent. The overnight call money rate hovered close to the MSF rate during the week.

In order to ease liquidity pressures, RBI conducted Open Market Operations (OMO) to buy around Rs 9,800 crore of government bonds from the market. “OMOs are only making sure markets get space for fresh issuances and there is no devolvement in government bond auctions. On the liquidity front, the net effect is outflows only,” said a senior treasury official from a large public sector bank. In fact, on May 4 the government had auctioned three of the government securities — 8.19 per cent maturing in 2020, 9.15 per cent maturing in 2024 and 8.97 per cent maturing in 2030 — bought by RBI in an OMO on Friday. On Friday, the government raised Rs 15,000 crore via sale of dated securities.

As a result, yields eased by 12 basis points during the week on account of bond purchases by RBI, though liquidity deficit stayed elevated. “Going forward, liquidity deficit is expected to stay at around Rs 1 lakh crore this month. Advance tax outflows and quarter-end pressure may add further pressure in June,” said N S Venkatesh, head of treasury, IDBI Bank.

RBI Deputy Governor Subir Gokarn recently said the central bank is trying to address the liquidity deficit issue. “Our concern was the systemic tight liquidity for long periods of time can disrupt normal banking operations and that’s one thing we have tried to address and respond to,” he said.