As a result, the overnight interbank call money rate has dropped below the repo rate of 7.75% while the short-term cost of borrowing for both government and private companies has fallen by as much as 300 basis points in the last three months.
Three-month funds now cost the government 8.65%, 260 bps less than what they did in September. Three-month commercial paper rates have also fallen to 8.80% from 11.90% in September.
Bankers, however, say this improvement is transient and that it would soon tighten once advance tax payments go out and oil companies settle what they borrowed from the central bank under the special dollar swap window. These repayments are likely to start from January.
However, for the next 3-6 months, the call rate would continue to hover near the repo rate rather than the marginal standing facility rate, which is 100 bps above the repo rate, said bankers. This would also imply that the repo rate would once again be seen as the operative rate.
We will see from December 15 onwards this liquidity reducing from the current levels. These levels are perhaps the best liquidity situation we are going to see for a long time, said Ashish Parthasarthy, head of treasury at HDFC Bank.
An estimated r60,000-r80,000 crore will move out of banks as corporate advance tax payments by December 15. Further, another r60,000 crore will go as payment for government bonds scheduled to be auctioned this month. Besides, payment for treasury bills and state loans to be auctioned will also suck out liquidity.
There are factors that will even out this liquidity. A clearer picture will emerge once the oil companies take delivery of their swaps, said Manish Wadhawan, head of rates at HSBC.
The surge in liquidity in the banking system in recent weeks is being attributed to the two swap facilities opened by the RBI in September, through which banks could swap their dollars raised through foreign currency non-resident (FCNR) deposits and overseas borrowings at a concessional swap rate.
The two swap facilities that ended on November 30 garnered a whopping $34 billion, with $11 billion coming in during the last fortnight alone.
The liquidity improvement is mainly through the FCNR swap, which got a huge amount towards the end of the scheme, sai NS Venkatesh, head of treasury at IDBI Bank.
As a result, bank borrowings from the repo tender and MSF are down to a trickle. Repo borrowings stood at r874 crore on Wednesday from a high of around r40,000 crore in September. The MSF borrowings are down to r150 crore from as high as r40,000 crore. The inflows into the banking system through the swaps could be around r90,000 crore if one assumes the swap for oil companies to be around $18 billion, said Wadhawan.
With liquidity expected to tighten, money market rates that have plunged in the last three months by 300 bps may climb up, albeit marginally.
While the overnight rate may hover close to 7.75%, rates on CPs and CDs may rise by 20-30 bps, dealers said.