Money continued to be tight on Tuesday with companies paying more to access funds. Yields on the three-month commercial paper inched up to 9.12%, higher than 9.09% on Monday and the 9% levels seen on Friday. However, liquidity with banks seems to have been more comfortable with the inter-bank call rate coming off to 6.50% as against 6.66% on Monday and 6.80% on Friday.
Three-month CDs (certificates of deposits) were commanding yields of 8.52%, higher than 8.40% on Monday. Nevertheless, they continued to borrow a fairly large sum of Rs 85,480 as against Rs 79,195 crore from the Reserve Bank of India?s (RBI) repo windows, though the amount was much lower than the amount of Rs 1,03,090 crore, accessed last Friday. Meanwhile, the yield on the 10-year benchmark paper closed at 8.06%, five basis points higher than Monday?s close.
Said Mishr, Head, Global Markets, Standard Chartered Bank said, ?The government balances with the RBI have been rising which is why liquidity could remain tight. Unless the government lowers its borrowings, we believe money will be in short supply.?
Said Joydeep Sen, SVP, fixed income (advisory) at BNPP Wealth Management, ?Money market yields have been moving up gradually since the past six months and by mid-December, advance tax outflows could add to the pressure on systemic liquidity, though temporarily.?
In a bid to help banks tide over the shortage of liquidity, the central bank on Monday allowed them to hold only 23% of their net demand and time liabilities in the form of government securities, or statutory Liquidity Ratio (SLR), as a temporary measure. Since October 29, 2010, banks have been maintaining an SLR of 24%. Moreover, banks can also access the second Liquidity Adjustment Facility (LAF) window till January 28, 2011, rather than December 16, 2010, announced earlier. Collectively, 2% of the net demand and time liabilities would amount to around Rs 95,000 crore. That?s close to the average amount of Rs 1 lakh crore, that banks have been borrowing from the central bank, over the past fortnight, with the amount being as high as Rs 1.45 lakh crore last Tuesday.
The RBI observed that ?even though a liquidity deficit is consistent with anti-inflation stance, excessive deficit in liquidity can be disruptive both, to financial markets and to credit growth in the banking system. To ensure that economic activity is not disrupted by liquidity constraints, the liquidity deficit needs to be contained within a reasonable limit.? The government is scheduled to borrow Rs 86,000 crore by way of auctions between now and mid-February, 2011, after having mopped up Rs 3.61 lakh crore, so far in 2010-11. Dealers, however, believe that the bond auctions, for three dated securities worth Rs 11,000 crore, scheduled on December 3, 2010, should find enough takers.