FE Editorial : Borrowing times

Written by The Financial Express | Updated: Jun 29 2010, 04:26am hrs
Just how effective is the liquidity management system operated by RBI and the finance ministry From the second week of June this year, banks have been borrowing huge sums of money from RBI, and on Thursday borrowed a record Rs 82,915 crore. The last time such a high level of borrowing by banks in India was seenafter the crash of Lehman Brothers in 2008at the onset of the global economic crisis. The spurt in borrowing started from June 7 onwards, with Rs 62,305 crore on the day, up from Rs 18,945 crore on June 4. The spurt in late-June is surprising as companies have already paid off their first instalment of advance taxaround Rs 30,000 crore. In addition, the 3G spectrum auction prices, of about Rs 68,000 crore, have also been paid by the telecom companies and Rs 38,000 crore for wireless broadband spectrum licences is also largely through. So what continues to cause the hump Nobody has made any comments that could explain the sharply raised cost of borrowing for banks. RBI, as a measure to infuse liquidity into the system, had allowed banks to maintain a lower SLR of up to 0.5% for a short period, until July 2. Now, with the sudden spurt in borrowing, it is to be seen whether the central bank will extend the time window for the special facility it has provided to banks. The effective rate in money markets is being capped by the 5.25% repo ratethe facility through which RBI lends to banks.

The sudden spurt in borrowing could lead to a spike in interest rates on various market instruments, bank deposits and government bonds. If the rush for heavy borrowings continues, the government may have to spend aggressively to bring money back into the system. Going ahead, the central bank will also have to play a fine balancing act in its forthcoming monetary policy next month. Any increase in the cash reserve ratioportion of deposits that banks park at the central bankwould put pressure on banks and any reduction in the CRR will signal a reversal of its policy stance. It could look at the possibility of buying back bonds from the market under its open market operations, since on July 2 a government bond worth Rs 15,515 crore is due for redemption and another redemption for Rs 34,000 crore is due on July 28. It will be a tough situation for both the government and the central bank to tide over.