Stock Market Seeks Way Out Of Liquidity Crunch

The market is looking forward to some concrete indicators from the central bank that there is an intention to infuse liquidity, which is the need of the hour, said Rajesh Sachdeva of Alliance Capital.

The stockmarket is hopeful of a cut in the cash reserve ratio (CRR) of banks in the forthcoming credit policy announcements on October 19.

B G Daga, chief general manager at UTI in charge of secondary market operations, says: There is a need to infuse more liquidity in the system so as to bring down the high interest rates. We have a situation where inflation rate is low and interest rates pretty high. This is highly incompatible. No economy can sustain this kind of a situation for long.

 

Says Sanjay Jha of ITC Threadneedle AMC: The current illiquid situation can be changed only when the banks infuse funds in the system, and a CRR cut will do just that.

According to him, corporates are in need of cash resources, but the high cost of funds has deterred them from resorting to borrowings. With a CRR cut becoming effective, banks can lend at an easier rate and the economy will grow, he added.

H Sadhak of LIC Mutual says the cash reserve ratio, now pegged at 13 per cent, is likely to be reduced, and consequently the supply of money in the system will be increased.

Assuming such a scenario, it can be estimated that funds will be available cheaper for corporate entities. This would, in turn, result in an improvement in their bottomlines, and the equity markets will thrive.

Says Devesh Kumar of W I Carr, The incremental deposit limit of 5 per cent for banks which are permitted for dealings in the secondary market should be increased to 10 per cent to help boost volumes in the markets. The export refinance facility to banks should also be withdrawn and there should be a 4 per cent band between the prime and the non-prime lending rates.

According to a leading investment banker, the market is passing through a phase where there is hardly any lending activity. Corporates have to keep a close watch on their non-performing assets and it is difficult to find quality borrowers. This involves greater risk. Therefore, a good cut in the CRR is needed to infuse liquidity in the system.

Many market players have been calling on the RBI for extending credit lines to the intermediaries in the market to carry out fund-based activities. Says a leading investment banker: The merchant banking business is passing through a very bad patch at the moment and intermediaries need to provide a variety of services to the market players.

There is a need for providing finance for such activities as the merchant banker needs to have a strong working capital base. The working capital requirement primarily includes finance for infrastructure such as computers, VSATs and networking equipment.

M G Damani, president of the Bombay Stock Exchange, has written to the Securities and Exchange Board of India on the matter and the regulator is expected to take up the issue with the RBI.

Recently, at a meeting of stock exchange chiefs, the participants voiced their concern about the liquidity crunch prevailing in the market. They demanded that the capital market intermediaries should be given the facility to borrow fully from banks with a margin of 30 per cent against shares and 20 per cent against bonds and debentures.

Analyst Merrill Lynch, in its latest report on India, has expressed optimism that the interest rates will come down even though they have tended to be high due to strong private sector credit demand and continued large private sector borrowing.

The largest equity market player in the world feels that further fiscal consolidation leading to lower government borrowing from the market.

The report lauds steps taken by the government to reduce the fiscal deficit. It is foreseen that such steps could reduce in the risk premium on government borrowing, putting downward pressure on interest rates.