The liquidity situation in the banking system doesn’t appear to have eased much. The banks continue to borrow an average of Rs 50,000 crore every day from the Reserve Bank of India’s (RBI) special repo window.
In fact, banks borrowed more than Rs 62,000 crore on Monday. Said Joydeep Sen, vice-president (fixed income), BNP India Wealth Management, ?Liquidity in the system still remains tight and the RBI has been funding the banking system to the tune of more than Rs 50,000 crore every day.?
Sen observes that rates on the three-month commercial paper (CP) and certificate of deposits (CD) have also moved upwards owing to a liquidity shortage. ?Rates on the three-month CPs are now at 6.77% as against 6.65% a week ago. At the same time, CD rates have also shot up to 6.45% as against 6.3% a week ago,? he added.
In a bid to help banks tide over the liquidity crisis, the RBI had, last Friday, extended the special repo window, for the second time, by another fortnight till July 30. However, the central bank is no longer allowing banks to maintain a lower statutory liquidity ratio(SLR) by 0.50%, as it had done earlier. ?On an assessment of current liquidity conditions and with a view to providing flexibility to scheduled commercial banks and primary dealers in their liquidity management, it has been decided to extend the second liquidity adjustment facility (LAF) on a daily basis till July 30, 2010,? the RBI said in a release last Friday.
Ananth Narayan, MD, (south Asia), Standard Chartered Bank, says the extension of the repo window by another fortnight makes sense as there is still a shortage in liquidity. ?If the window had not been extended, the overnight rates would have gone up,? he explained.
The RBI allowed banks to maintain a lower SLR, by 0.50%, and raise funds from it through a second liquidity adjustment facility, till July 16. The apex bank will continue to conduct two LAFs every day and has also cut down the size of treasury and bond auctions.
However, treasurers are of the view that liquidity will soon come back into the system.
?We expect the liquidity to improve, thanks to gilts worth Rs 30,235 crore maturing on July 28, and moreover, government expenditure, over a period of time, would also add to liquidity. So we can expect yields on money market instruments and shorter maturity bonds to ease as the scenario improves,? said BNP’s Sen.
Funds close to Rs 30,000 crore moved out of the banking system before June 15 towards the first instalment of corporate advance taxes. At the same time, telecom companies have paid the government Rs 67,700 crore for 3G spectrum, most of which was funded by banks while another Rs 35,000 crore moved out on account of BWA licences. Sen is of the view that the market would expect a lower quantum of government borrowings than that announced in the Union Budget, due to the success of the 3G and BWA auctions.