Borrowings by banks under daily LAF almost four months high

The liquidity deficit in the system is almost near to four months high due to outflow of funds from banks due to the festive season. Banks borrowed Rs 1,016,35 crore under the repo auction of Reserve Bank of India's (RBI) daily Liquidity Adjustment Facility (LAF) compared with Rs 86,260 crore on Wednesday. The liquidity deficit was Rs 1,06,430 crore on June 22 and it stood at Rs 1,01,580 crore on June 26.

“Tomorrow being a reporting Friday, banks are covering for the liquidity deficit to ensure that the Cash Reserve Requirement (CRR) is met. But there is also liquidity tightening in the system because of the festive season. There are withdrawals by customers from the banking system. The government spending is also yet to flow back into the system,” said NS Venkatesh, chief general manager & head of treasury, IDBI Bank. The daily average borrowing under RBI's LAF has been above Rs 50,000 crore in the last one month.

 

CRR is the proportion of total deposits a bank has to keep with RBI as cash. In the mid-quarter review of the monetary policy held last month, the RBI had cut the CRR by 25 basis points to 4.5 per cent of banks Net Demand and Time Liabilities (NDTL). NDTL is measured every alternate Friday by banks and these Fridays are called reporting Fridays.

But the liquidity situation is expected to improve soon. “Since RBI has made a commitment that they will always ensure that liquidity does not go above the +/- 1 per cent of the NDTL, I would think that either they will have to cut the CRR or they will resort to Open Market Operations (OMOs) purchase auction of gilts,” said Hitendra Dave, managing director, head of global markets, India at Hongkong and Shanghai Banking Corporation (HSBC).

The RBI will detail its second-quarter monetary policy review on Oct 30 and most bankers expert a further cut in the CRR. “A 50 basis points cut in CRR will bring down the LAF borrowing and the daily average borrowing will then be in the range of Rs 37,000-40,000 crore,” said  Mohan Shenoi, president - group treasury and global markets, Kotak Mahindra Bank.

According to Venkatesh with enough liquidity in the system, the monetary transmission will also become faster.