Banks are starting to feel the effects of the liquidity squeeze. The uncertainty over short-term rates has forced bankers to raise funds through one-year bulk deposits at rates higher than what they offer to retail depositors for similar maturities.
As a result, one-year term-money rates, raised through the issue of certificates of deposits (CDs) have risen by at least 75-80 basis points this month, against last month?s average of 8.2%. The latest bank was UCO, which raised Rs 295 crore at 9% on Tuesday.
Alongside, the RBI, by rejecting the entire lot of bids received on Wednesday for the Rs 3,000-crore Treasury bill auctions under the market stabilisation scheme (MSS), has virtually signalled a tightening of liquidity in the market, and that the central bank does not want to suck any more money out of the system. RBI?s move on MSS also indicates that rates are not going to rise.
Uncertainty, however, still prevails among bankers as they see December as a month of heavy outflows. The outflows are on account of advance tax payments in mid-December, conservatively estimated at Rs 35,000 crore.
The market is already short of Rs 41,000 crore in cash due to Diwali withdrawals that have not returned to the banking system and the new higher cash reserves of 7.5% (from 7%) that banks have to maintain on net deposits. They are estimated to be Rs 25,000 crore and Rs 16,000 crore, respectively, of which the CRR portion will be effectively drained out of the system this weekend.
The demand for CDs has also picked up significantly. Holders of most CDs are mutual funds facing redemption pressures. ?I have picked up over Rs 3,500 crore in CDs last month from such sellers,?? said an official at a large government bank.
Most bankers said they did not want to raise retail deposit rates, hovering at 7-7.5%, purely because they were unable to estimate the quantum of deposits that would come in.
Sensex drop continues
Equity bourses succumbed to domestic and global pressures on Wednesday with the 30-share Sensex of the BSE extending its downward journey by another 678.18 points, thereby losing 1,030.74 points, or 5.24%, in the last two trading sessions. The Sensex closed the day at 18,602.62 points.
The news of a possible hike in the securities transaction tax, as reported exclusively by FE on Wednesday, seriously unsettled local bourses.
Globally, crude oil almost hitting $100 a barrel and the lower projection of US economic growth for 2008 by its central bank drove down major equity indices. The broader Nifty of the NSE lost 219.85 points, or 3.80%, at 5,561.05 points. All the BSE sectoral indices were down in the 1.50-6% range.
