Bankers expect extension of RBI?s special liquidity facility

As liquidity in the system continues to tighten,?treasury managers at banks expect the special repo window, which was launched?by the Reserve Bank of India (RBI), to be extended beyond July 2.

The RBI on May 28 announced second round of Liquidity Adjustment Facility (LAF) window for banks for up to 0.5% of their deposits.

Says Ananth Narayan, MD & head of rates for South Asia financial markets at Standard Chartered Bank, ?I expect the repo window to be extended. The central bank will ensure all measures are taken to provide banks with liquidity.?

Asutosh Khahjria, chief general manager & head treasury, IDBI Bank, explains that RBI may extend the special window liquidity facilities beyond July 2 in case the liquidity condition continues to remain tight in the coming week. However,?the ongoing crunch seems to be short-lived as it is on account of the payments towards 3G auctions, broadband wireless access and advance tax. There is nothing to worry about liquidity.

In July alone, two bonds are going to redeem Rs 42,000-44,000 crore. Moreover, the government is going to spend the borrowed money, which will be back into the system, he adds.

In a bid to cope up with the liquidity crunch in the banking system, banks have borrowed Rs 75,110 crore from the central bank?s special repo window.

On Thursday, banks borrowed a record high of Rs 82,915 crore from the central bank. Call rate ended at 5.25-5.40% as against 5.20-5.25% on Thursday.

At the same time, three-month certificates of deposits (CDs) were traded at 6.15-6.35%, as compared with 6.20-6.30% on Thursday, while commercial papers were quoted flat from the previous day at 6.50-6.80%.

One-year CDs were dealt at 6.80-6.90%, compared with 6.75-6.85% on Thursday.

Recently, as a measure to infuse liquidity into the system, the central bank has allowed banks to maintain a lower SLR of up to 0.50% for a short period till July 2, 2010. However, the apex bank has assured that banks can seek waiver on penal interest if they fall short of maintaining the SLR requirement.

The RBI now conducts two liquidity adjustment facilities (LAF) operations every day, allowing banks to access funds from it.

The regulator has also availed the tool of buying back of securities to infuse some liquidity into the system. So far, Rs 20,000-crore worth securities have been bought back from banks.

With companies paying the first instalment of corporate advance taxes, around Rs 30,000 crore has moved out of the banking system. At the same time, telecom companies have paid the government close to Rs 68,000 crore following the 3G spectrum auctions, most of which has been funded by banks. Another Rs 38,000 crore flowed out for payments for wireless broadband spectrum licences.