Spike in LAF borrowing temporary advance tax outflows a reason

The sudden increase in borrowings by banks under the Reserve Bank of India (RBI)’s daily Liquidity Adjustment Facility (LAF) is seen as temporary. The borrowings had risen because of recent advance tax outflows and banks rushing to maintain their cash reserve ratio (CRR) requirement for the reporting Friday (September 21).

Today, banks borrowed Rs 84,690 crore under the daily LAF window, compared with an average of about Rs 40,000 crore in the last one month.

“The daily LAF borrowing has gone up due to the advance tax outflow,” said Mohan Shenoi, president (group treasury and global markets), Kotak Mahindra Bank. The deadline for filing advance tax returns for the second quarter was September 15. According to market estimates, this outflow stood at Rs 40,000-50,000 crore.

N S Venkatesh, chief general manager & head of treasury, IDBI Bank, said an important factor for the rise in borrowings through the daily LAF window was adjustment of CRR needs. “Yesterday being a holiday and tomorrow being a reporting Friday, today, banks are borrowing under LAF to maintain 4.75 per cent CRR for this fortnight. On a reporting Friday, liquidity is tight. So, banks are borrowing today to account for the shortfall,” he said.

CRR is the proportion of total deposits a bank has to keep with RBI as cash. This is the last fortnight in which banks have to maintain their CRR requirement at 4.75 per cent of net demand and time liabilities (NDTL). Early this week, RBI had cut CRR by 25 basis points to 4.5 per cent of banks’ NDTL, and this move would be effective from the fortnight beginning September 22.

Banks measure NDTL every alternate Friday, and these Fridays are termed ‘reporting Fridays’.

As the CRR cut would be effective soon, the daily LAF borrowing is expected to decline. “Starting next fortnight, I believe the daily LAF borrowing would come down to Rs 45,000-46,000 crore. This is because of the CRR cut, which would release Rs 17,000 crore into the system. From the next fortnight, banks would have to maintain 4.5 per cent CRR,” said Venkatesh. He added the advance tax outflow, which had sucked liquidity out of the system, would find its way back in the last week of September.

The Street expects the liquidity scenario to be comfortable for the remainder of the current financial year.

“For the rest of the financial year, I expect daily LAF borrowing below Rs 50,000 crore because bank credit is not growing, as banks are credit-averse,” said Shenoi.

RBI may also take steps to maintain a comfortable liquidity level. “Overall, the system deficit is expected to be maintained at RBI’s comfort level of one per cent of NDTL through the rest of the financial year. If required, RBI can inject liquidity through open market operation (OMOs) bond purchases in the money market, and US dollar purchases in the foreign exchange market,” said J Moses Harding, head, ALCO and economic and market research, IndusInd Bank. He added OMOs would be conducted if daily LAF draw-down exceeded Rs 1,00,000 crore.