Increased govt spending, rise in deposit rates ease cash crunch.
With advance tax payments coming into the system and government spending picking up, banks’ borrowing under the liquidity adjustment facility (LAF) fell to a month’s low of Rs 68,150 crore today.
Dealers expect the situation to remain stable. Reason: The government has increased spending and open market operations are scheduled this month. Though the system will be in deficit, dealers expect banks to borrow Rs 50,000-70,000 crore daily from the Reserve Bank of India’s (RBI’s) repo window this month.
The daily liquidity deficit, on an average, was more than Rs 1 lakh crore in the past two months, well above RBI’s comfort zone of Rs 50,000 crore.
“The situation is sustainable. Banks will continue to borrow Rs 50,000-70,000 crore (daily) from the repo window. It will only improve, going forward. Both the government and the central bank’s efforts have eased the liquidity situation. We expect the borrowing to fall to Rs 30,000-35,000 crore (daily) by the end of the financial year,” said a senior executive of a public sector bank.
RBI had reduced the statutory liquidity ratio by 100 basis point of net demand and time liabilities. In addition, it had announced buyback of bonds worth Rs 40,000 crore in January.
RBI also allowed banks to avail of additional liquidity under LAF to the extent of one percentage point of net time and demand liabilities.
“RBI’s aggressive stance has yielded a desirable result. The deferment of auctions, open market purchases, intervention in the forex market and a cut in SLR has released money into the system,” said IndusInd Bank’s head, global markets, Moses Harding.
Harding added RBI might take away the temporary SLR relief of one per cent on the net time and demand liabilities after the liquidity turns positive. “RBI will (then) unwind the temporary accommodative stance to fight liquidity and focus on inflationary pressures.”
Dealers expect the shortfall to end by the middle of this month. The central bank had said it would be comfortable with a deficit or surplus of Rs 50,000 crore in the system.
However, Edelweiss Capital says despite the RBI action, the liquidity deficit will remain high at Rs 80,000-1,00,000 crore till the second week of February.
“Post mid-February, with the end of the government borrowing programme for financial year 2011, we expect liquidity conditions to improve as government spending picks up, coupled with shift of money in circulation to the banking system due to higher deposit rates on offer.”
