With banks facing a severe liquidity squeeze, they have started borrowing heavily through the repo window of the central bank.
According to data from the Clearing Corporation of India, banks have borrowed Rs 92,000 crore from the Reserve Bank of India?s (RBI?s) repo window on Friday, as against Rs 81,135 crore on October 8 and Rs 63,285 crore on October 7. On Friday, primary dealers were the highest borrowers in the repo market followed by private sector banks and foreign banks. Primary dealers had 37.46% of the market share, while private sector banks got 30.12%. Foreign banks logged 17.77%, while PSBs borrowed the remaining 14.64%, through the repo window.
In the lending category, foreign banks were the largest lenders with 68.52% of the market share, followed by mutual funds at 15.83%.
In a bid to ease the liquidity crunch to some extent, the RBI slashed the cash reserve ratio (CRR) by an additional100 bps. The move is likely to pump in Rs 60,000 crore into the banking system, which comes into effect from Saturday.
With regard to the current liquidity condition, the Centre, in consultation with the RBI, decided to cancel auctions worth Rs 10,000 crore scheduled for October 10.
?This is definitely good news for the banking system. Banks will now borrow less through the liquidity adjustment facility (LAF) window. With the LAF borrowing coming down substantially, call rates and collateralised borrowing and lending obligation (CBLO) rates will ease. We can expect the call rates to slide to 8.5-9% in the next few days. Advance tax outflows and FII outflows have created a tight liquidity condition,? said NS Venkatesh, MD&CEO at IDBI Gilts.
With the central bank infusing Rs 60,000 crore into the banking system, it would now create an additional income for banks by roughly around Rs 4,000 crore on a half yearly basis, he added. Traders expect the certificates of deposit (CD) rates to fall too. On Friday, three-month CDs were quoted at 13.50-4% as compared to 13.00-13.25% on Wednesday while similar tenure commercial papers were quoted at 14-14.50% as against 13.70-14.00%.
?Going forward, CD rates may come down a bit by 100-150 bps,? said a dealer. Traders believe the liquidity scenario now looks comfortable as the 6th pay commission of Rs 25,000 crore will happen along with Rs 40,000 crore through farm loan waiver and Rs 20,000 crore through fertiliser subsidy. ?The central bank has made sure there is sufficient liquidity for banks to lend for productive purposes,? said Venkatesh. According to Golak C Nath, vice-president & economic advisor with CCIL, there may be another round of a cut in CRR by 50 bps to check liquidity.
?With the CRR cut happening, we can now expect the call rate, repo and CBLO rate to ease,? said Nath.
