Flood of Liquidity before monetary review

Raghu Mohan

Mumbai, April 11: A surfeit of liquidity in the run-up to the Reserve Bank of India’s (RBI) monetary review on April 19 saw the central bank accept seven bids for Rs 18,160 crore at its one-day repos auction on Wednesday. A perk up in liquidity has been witnessed since the beginning of this month with repos-outflows moving up from Rs 8,000 crore on end-March 2001 to its current levels. Reasons attributed to the same range from the ubiquitous winding down of window-dressing by banks, coupon payments, and purchase of dollars by the central bank.

The extent of the liquidity surplus can be gauged from the fact that despite heavy outflows in repos-auctions, call rates have shown no signs of perking up: a clear indicator that there is sufficient funds to take care of daily inter-bank needs. Further, even after the RBI stated that banks have to maintain 100 per cent of their cash reserve ratio needs, no call rate flare-up was seen, especially in the last fortnight when the reporting Friday shifted by three days on account of holidays.

“There was window dressing by banks towards the end of March. These positions are being wound down, leading to liquidity overhang,” says Credence Analytics analyst, Sunita D’Sa.

This is borne by the fact that in the last week of March, nearly Rs 16,500 crore came in via reverse-repos auctions.

Coupon and bond-redemptions have added nearly Rs 3,000 crore into the system. This, and the central bank’s dollar-purchases have aided liquidity.

Bond prices though have held flat during the period. Says ING Bank’s chief executive (India), Atul Sahasrabuddhe: “Banks had built up their dated-stock books towards the end of the last fiscal... now there is not much interest, and bond prices are flat”.

Credit offtake figures for the fortnight gone by show that it grew by Rs 4,000-odd crore, and Mr Sahasrabuddhe points out that appetite for credit is rather sluggish. “I do not think that this a case for lower interest rates...interest rates is not the issue here. Appetite for credit is poor, and all the more given the prevailing gloom.”

The general feeling in the inter-bank markets though is that the liquidity overhang is temporary, and that there will be no rate cuts by the central bank.

The market is of the view that a few auctions, and it will be back to usual levels. All eyes are now on price-based auction of the 10.95 per cent 2011 paper for Rs 4,000 crore on Thursday.