Volumes in the overnight money market have dipped significantly while the liquidity shortage in the banking system persists. Commercial banks continue to borrow over Rs 60,000 crore every day from the Reserve Bank of India?s repo window at 5.25% interest rate.
Also, volumes in the collateralised borrowing and lending obligations (CBLO) market, which helps banks to borrow short-term funds and deploy surpluses, have reduced to below Rs 30,000 crore in the past two weeks, compared to over Rs 40,000 crore in the first half of June. Money market participants say the activity in this segment of the financial segment has remained muted due to the persisting liquidity shortage.
?Almost Rs 1,30,000 crore has gone out on account of spectrum and broadband auction and another Rs 50,000 crore, due to advance tax payments. Also, the government is not spending. This has caused this liquidity shortage, which mirrors the situation that was prevalent at the heat of the financial crisis after the Lehman bankruptcy in September 2008,? said Golaka C Nath, senior vice-president, Clearing Corporation of India Ltd (CCIL).
?We haven?t seen this kind of liquidity shortage for such a long period of time. Things are not very good. Even the CBLO volumes are absolutely down,? said Nath. CCIL helps banks, mutual funds and insurance companies to deploy short-term surpluses with other lenders through its CBLO.
This facility was introduced for allowing non-bank financial entities to borrow money against government bonds or deploying surplus funds. There is no counter-party risk in the CBLO segment as CCIL guarantees settlement. The lack of liquidity in banks have seen CBLO volumes dip. But market participants do not expect RBI to reverse its unwinding strategy, though, the government could tweak its borrowing schedule.
?We don?t expect any immediate RBI action on account of this. The monetary policy will be focussed more towards managing inflation rather than a temporary liquidity problem,? said a banker.
?This week is expected to see some good inflows on account of maturing government securities (Rs 11,893 crore on July 2) but the liquidity position is expected to continue in the deficit zone and the overnight rate would stay in the 5.30-5.50% band,? Kotak Mahindra Bank said in a research note. ?With the government likely to continue with its normal pace of expenditures, we stick to our earlier view that the systemic liquidity can improve only by the end of July,? it said.
A finance ministry official said the government can reduce its scheduled borrowing next week if the cash crunch continues. On Monday, the government reduced the size of its bond issues to Rs 10,000 crore, down from Rs 13,000 crore as planned earlier.
The Centre is expected to make up for this shortage in the second half of its borrowing calendar while expectations are also high it could pare its borrowing target following the record one-time revenue from spectrum and broadband auction. Freeing up of petrol prices is another positive for government?s finances.