Commercial banks initiatives to mobilise additional deposits and higher government spending will help meet the outflows of advance tax due next month without the additional liquidity support from the central bank, bankers and economists said.
??Banks have been mobilising resources which should be sufficient to meet the tax outflow. It is unlikely that liquidity will be under strain in September,?? Sunil Sinha, head and senior economist at Crisil Ratings, the Indian unit of Standard & Poor?s Rating.
Bankers also see liquidity returning to the system from additional government spending after it got nod on Wednesday for Rs 54,589 crore additional spending in 2010-11 (Apr-Mar).
Most public and private banks have hiked deposit rates by 25-75 basis points to shore up deposits to meet higher credit growth after the RBI?s recent increase in repo and reverse rates by 25 and 50 basis points, respectively, to curb inflation and inflationary expectation.
The deposit mobilisation drive also began after RBI said it would keep liquidity tight to curb inflation as part of a move towards effective transmission of monetary policy. Bank deposits have grown at a slower pace of 14.5% so far this fiscal compared with 20% credit growth, leaving a funding gap.
??Banks will have to continue to raise their deposit rate to bridge the gap between deposit rate and credit growth rate,?? said Murthy Nagaraj, head of fixed income at Tata Mutual Funds. Concerns over liquidity resurfaced Wednesday after Reserve Bank of India injected funds into the banking system for a third consecutive day.
Banks borrowed Rs 16,530 crore on Wednesday after borrowing Rs 2,500 crore on Tuesday and Rs 3,000 crore on Monday.
The tightness may be temporary and could ease by the month end on government spending, dealers said.
Additionally, economists are drawing comfort that tax outflow in the fiscal second quarter is unlikely to be higher from the first-quarter outflow of Rs 26,880 crore, up 31% from previous year.
??The outflow can be handled,?? Sinha said. Analysts speculated that second-quarter corporate profits are unlikely to be higher owing to higher raw material costs.