Despite RBI measures to tackle liquidity shortage, short-term money market rates remain high. As central bank governor D Subbarao observed on Friday, the ?effective rates? have risen. While the RBI governor doused expectations of an immediate increase in policy rates, overnight call money rate has indeed been hovering around the 5.25% mark (which is current the repo rate) as against 3.75% a month-ago (the reverse repo rate).
Also, with money moving out of the system, rates on the three-month certificates of deposit (CD) have risen by 180-200 basis points in the last month. However, with the central bank scheduling the second tranche of securities buyback from banks for Rs 10,000 crore for June 21, the money market could become less tight. RBI bought gilts worth Rs 10,000 crore last Friday even as it auctioned Rs 6,000-crore papers which saw some development.
According to Joydeep Sen, senior vice-president (fixed income), BNP India Wealth Management, RBI has been very proactive in managing liquidity, and the open market operations (OMO) will ease the liquidity shortage. As Sen pointed out, the yields on three-month CDs were now at about 6.32%, up significantly from 6% a week ago while the one-year CD yield was at 6.83%, up from 6.73% a week ago. ?The CD yield curve is inverted between one to three months,? he added. Abheek Barua, chief economist at HDFC Bank expects the 10-year benchmark bond to trade in the range of 7.5-7.7% in the near term as concerns over fiscal deficit have eased. The yield on the 10-year benchmark paper, 7.8% bond maturing in May 2020, closed at 7.56% on Friday.
Interestingly, the amount of money that banks have been borrowing from the RBI?s special repo window has fallen sharply to a daily average of Rs 35,000 crore for the week ended June 18 as against an average of Rs 60,000 crore on June 11. With companies paying the first installment of corporate advance taxes, around Rs 30,000 crore have moved out of the banking system.
At the same time, telecom companies have paid the government close to Rs 68,000 crore following the 3G spectrum auctions, most of which has been funded by banks. Another Rs 35,000 crore is expected to flow out for payments for wireless broadband spectrum licences. The central bank has allowed banks to maintain a lower statutory liquidity ratio of up to 0.50% for a short period till July 2, 2010. RBI now conducts two liquidity adjustment facilities (LAF) operations every day, allowing banks access funds from it.
Bankers believe liquidity will be back in the system once the government starts spending.
?The money will come back with a lag effect. Moreover, with credit growth still not too strong, banks are not really in dire need of funds. Having said that, if the liquidity situation gets worse, we could see some banks increasing their rates on deposits to attract money,? says M Narendra, executive director, Bank of India.