Sustained liquidity deficit may push up deposit rates

Banks borrowed a net Rs 135,945 cr from RBI after the two LAF auctions on Wednesday.

A sustained liquidity deficit and the need for banks to borrow from the Reserve Bank of India’s (RBI) liquidity adjustment facility (LAF) auctions could prompt lenders to increase their term deposit rates, bankers say.

Short-term money market rates are already rising and the rates on certificates of deposits rose by about half a percentage point over the past couple of months, bankers say. A one-year CD is currently at 8.5 per cent.

With the liquidity deficit higher than Rs 100,000 crore for a second day, bankers said they may seek more relaxations from RBI to ease the situation. Banks borrowed a net Rs 135,945 crore from RBI after the two LAF auctions on Wednesday. Banks borrowed a net Rs 148,490 crore from the RBI yesterday, the highest ever.

While RBI has voiced opposition to giving any more relaxations to banks, some bankers said they would welcome further easing by the central bank.

On November 9, RBI opened a second LAF window and additional liquidity support of up to one per cent of net demand and time liabilities (NDTL), both available till December 16. It said these were “to provide liquidity comfort arising out of frictional liquidity pressure”.

On Monday, RBI Deputy Governor Shyamala Gopinath said there was potential liquidity in the market and RBI had already taken various measures, including allowing banks to maintain their Statutory Liquidity Ratio a per cent below the requirement of 25 per cent. The central bank was monitoring the liquidity situation, she said.

Gopinath also highlighted that overnight call money rates were steady around the RBI repo rates and it’s only when rates rise higher than a particular level that it causes panic.

Earlier this month, Subir Gokarn, another deputy governor, said the RBI cutting cash reserve ratio for banks while raising interest rates would be contradictory signalling. He said SLR relaxations, some open market operations and the rescheduling of buybacks were all measures to solve short-term liquidity problems without sending wrong signals about RBI’s inflation stance.