Liquidity in the banking system may remain tight, with various corporates looking to make advance tax payments, goods & services tax payments and redemption of targeted longer-term refinancing operations in March.
The tight liquidity conditions are likely to remain going ahead, as central banks remain focused on removing excess liquidity from the financial system in order to tame inflation, say experts.
“Liquidity has been tightening and the RBI has been following a policy of keeping liquidity at lower levels than what they were earlier. CP rates are the first to respond because they are closely linked to Treasury Bill rates. Treasury Bill rates have shot up and I think the lending rate curve will move up, so things will become a little more costly for borrowers, starting with corporate borrowers, and this will slowly move to retail. There could be some seasonal relief on the interest rates going into April, but it will depend on the RBI’s policy,” Abheek Barua, chief economist, HDFC Bank
“Even if there is some seasonal relief, liquidity is likely to be tight. The borrowing calendar will be announced, so things will ease a little post March. But on average, it will stay tighter than what you would have seen in the previous April, considerably tighter. That is because of the global inflation challenge and the local inflation challenge. This is going to continue. The RBI is still in a mode of withdrawal of accommodation, they are not turning neutral,” he added.
The excess cash with banks eased to `1 trillion this week, compared to a peak of about `9 trillion in March last year, according to the Bloomberg Economics India Banking Liquidity Index.
On Friday, the RBI held a 14-day variable rate repo auction for `1 trillion to inject liquidity into the financial system.
Banking system liquidity is typically a feature of the end of the financial year, when there is a surge in credit offtake. Various corporates tend to borrow in order to make advance tax payments and goods & services (GST) tax payments.
But unlike previous years, the tight liquidity scenario has a structural component this time, with central banks in India and abroad taking measures to tame inflation.
India’s CPI inflation fell to 6.44% in February from 6.52% in January, latest data showed. However, the inflation reading in February was still higher than Street estimates.
“Inflation in India is expected to decline for the next two readings. Globally, inflation may be a concern. This time, global central banks seem to be more concerned about inflation than the expected economic slowdown; the response from them may be slow this time. We expect the US Federal reserve to continue with 25 bps rate hikes in the next two policy meetings, as the target inflation of 2% is still far away and the economic data points are not demonstrating any concerns of slowdown,” Vinod AN, general manager and head treasury, South Indian Bank