Short-term rates ease with better liquidity

Further easing likely to be limited as banks might need to attract more deposits to meet expected rise in credit demand

Short-term rates, particularly in the one-month tenure, have eased significantly in the past one month due to comfortable liquidity. These include Certificates of Deposit (CDs) and Commercial Paper (CP).

However, experts say, further easing is likely to be limited, as banks might need to attract more deposits to meet an expected rise in credit demand.

Borrowing by banks under the Reserve Bank of India’s (RBI’s) Liquidity Adjustment Facility (LAF) dropped to Rs 4,525 crore on Friday, compared to the daily average of Rs 55,310 crore a month earlier. The easing is due to the flow of government spending into the system.

“Liquidity outlook for the next couple of months is expected to be fairly benign. But rates might not fall significantly from here, as they have already fallen quite sharply,” said Suyash Choudhary, head-fixed income, IDFC Mutual Fund (MF).

Rates have also eased in the call money market. Three-day rates ended at 6.62 per cent on Friday, compared with the previous close of 6.80 per cent. A month before, it was 7.28 per cent.

Yet, despite easing of rates, there hasn’t  been much issuance of CDs and CP, said Dwijendra Srivastava, head of fixed income, Sundaram MF. He says this is because there hasn’t been much demand for working capital loans, for which these instruments are mostly used.

“CD and CP rates might ease further by about 10 basis points from here,” said Ramesh Kumar, senior vice-president (debt), Asit C Mehta Investment Interrmediates.

Some feel RBI might cut banks’ Cash Reserve Ratio (CRR) further in the first-quarter review of monetary policy on July 30. CRR is the proportion of total deposits a bank has to keep with RBI as cash; it is currently four per cent of net demand and time liabilities. A further cut in CRR will result in a further fall in short-term rates.

Yet, at some juncture, says Choudhary, the demand for more deposits will also start. Besides, from September, the deficit will start widening again as currency in circulation increases during the festive season and there is the deadline for the second instalment of corporate advance tax payment.