Banks liquidity position worsens

This is leading to speculation that RBI may soon go for another cut in CRR.

The systemic liquidity position has deteriorated further with net daily liquidity injection by the Reserve Bank of India (RBI) into the banking system rising to record levels,leading to speculation that the central bank may soon go for another cut in cash reserve ratio (CRR) to boost the cash supply in the system.

On Tuesday,cash-strapped banks borrowed a whopping Rs 1,81,000 crore from the LAF (liquidity adjustment facility) corridor of the RBI. This is three times of the RBIs stated liquidity deficit comfort zone of Rs 60,000 crore. The RBI first cut the CRR the proportion of deposits that banks must keep with the central bank by 50 basis points to 5.50 per cent in January 2012,releasing Rs 32,000 crore into the banking system.

Systemic liquidity in India has deteriorated since late December with net liquidity injection by the RBI in the banking system rising to an average of Rs 1,30,000 crore as compared to Rs 59,500 crore between April-December 2011. Not surprisingly,the banks have had to resort to the Marginal Standing Facility provided by the RBI at 100 bps higher than the repo rate of 8.5 per cent couple of times, said Upasna Bharadwaj,economist,ING Vysya Bank.

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Ashutosh Khajuria,president treasury,Federal Bank,said,The RBI accepted 70 bids at Repo auction today amounting to Rs 1,81,000 crore,probably the highest figure ever. The tight liquidity conditions as suggested by higher repo borrowing figures could be attributed partly to forex intervention through forward sales maturing now,higher supply of Treasury Bills funded by Repo borrowing but not matched by the government spending and use of Repo funds to acquire short-term assets (7-30 days money market instruments viz. CPs/ CDs) are quoting at 100 bps above repo rate.

The tight liquidity conditions,coupled with the persistence of rate hikes by the RBI have led to firming up of the cash market rates since the beginning of the 2011-12,bankers said. The overnight call rates have risen from about 6.5 per cent in early April to 9.15 per cent currently,briefly breaching the 10 per cent mark last month. Overall funding costs have risen,with the 12-month Certificate of Deposit (CD) rates having risen by 42 bps since early January while 3-month rates have risen more sharply by 95 bps. We expect RBI to conduct only one more OMO (open market purchase) worth Rs 10,000 crore and then consider a CRR cut worth 100 bps in a phased manner,with a plausible next action prior to the March 15 meeting if such deficit still persists, Bharadwaj said.

Why is the liquidity under pressure? First,the RBI has been intervening heavily since December in order to curb the sharp depreciation in the rupee. It sold dollars worth $7.8 billion in the spot market and $1.37 billion in the forward market in December,causing a net liquidity drain of almost Rs 33,500 crore. According to bankers,another important factor causing the stress this quarter has been the slowdown in the government spending,far below the normal trend. Third,liquidity tightness in the current scenario can partly be explained by the rise in the currency in circulation.