Liquidity blues prompt Centre to borrow below scheduled target

Written by fe Bureaus | Mumbai | Updated: Jun 30 2010, 03:42am hrs
The government on Monday cut back its immediate market borrowing by Rs 3,000 crore, citing liquidity concerns in the economy. This is the first time this fiscal the finance ministry has settled for a borrowing below its scheduled mop-up.

While the ministry said it will raise the amount during the remaining period of the issuance calendar, the reduced borrowing will ease the pressure on banks cash positions for now. On Monday, banks borrowed Rs 62,940 crore from RBIs special repo window, slightly below Fridays Rs 75,110 crore. Throughout June, banks have borrowed heavily to meet cash requirements after 3G auctions, advance tax payments and government borrowing sucked out over Rs 1,35,000 crore from the banking system.

Heavy bank borrowings have raised the cost of funds and made it difficult for the Reserve Bank to take a call on changing those rates. On July 27, RBI will announce the first quarter review of its monetary policy.

The finance ministry said the plan to reduce borrowing for now, has been done on review of the cash position of the Government of India and present liquidity conditions in the financial markets, clipping the borrowing to Rs 10,000 crore during June 28-July 2 auctions instead of the planned Rs 13,000 crore. Analysts expect the government could borrow slightly less than its target in 2010-11, as it has turned somewhat cash-rich.

Said RK Gurumurthy, head of trading, financial markets at ING Vysya Bank: Liquidity is still under pressure and we just have four more days to utilise the special window that RBI has come up with. Last week, banks had borrowed as much as Rs 2,61,850 crore from the special facility. Dealers feel RBI may keep the special window open longer. Said Ananth Narayan, MD & head of rates for South Asia, Standard Chartered Bank: I expect this facility to be extended, since RBI will ensure all measures are taken to provide banks with liquidity. So far, RBI has bought securities worth Rs 20,000 crore to infuse liquidity.

The government will auction three securities on July 2 to raise Rs 10,000 crore: the 7.46% bond maturing in 2017 for Rs 3,000 crore, the 8.20% bond maturing in 2022 for Rs 4,000 crore and a new 30-year stock for Rs 3,000 crore. The tenure of the stock will notionally commence from 2 July, 2010 and the interest on this stock will be paid on a half-yearly basis on January 2 and July 2. The payment for the stock by the successful bidders will include accrued interest on the nominal value of the stock from the notional commencement date of tenure of the stock at the coupon rate emerging in the auction.

With corporates paying the first installment of 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 for 3G spectrum, most of which was funded by banks. Another Rs 38,000 crore flowed out for payments for BWA licences.