Mumbai: Indian banks are likely to face further tightness in cash conditions next month as the second round of advance taxes are paid by companies, but the situation is expected to ease by the end of September on government spending, investors and analysts said.
Banks are already reeling under a cash crunch, following more than Rs1 trillion of payments towards telecom spectrum, while higher rates amid rising inflation has led to expectations that the Reserve bank of India (RBI) may not act to ease it.
Short-term rates, which are driven by liquidity, are already rising on expectation of tightness coming up and are expected to extend their rise till mid-September, traders said.
“Rates are already higher pricing in cash tightness and further incremental upside will happen but not big movements,” said Murthy Nagarajan, head-fixed income, Tata Asset Management.
The one-year overnight indexed swap rate may rise to 6.35-6.40% by end-September from 6.25% now, while the three-month treasury bills, which have already risen 53 basis points since July-end, may rise to 6.30-35% from 6.27% now, he added.
Currently, banks are borrowing around Rs10,000 crore from the central bank’s repo window in August which may go up to around Rs50,000 crore in September following the advance tax payments.
“The liquidity shortfall can go to about Rs40,000-50,000 crore by mid-September, which is a large deficit for the market and that’s why I feel rates are inching up faster,” said Monan Shenoi, head of treasury at Kotak Mahindra Bank in Mumbai..
Expectations of a mid-quarter rate increase by the central bank on 16 September, is also keeping up the upward pressure on short-term rates, said analysts.
However, dealers are not overtly concerned as they are aware that central bank intends to keep cash tight and banks can borrow from the repo window to bridge any liquidity mismatch.
“Every quarter whenever advance tax outflows happen you will see the money returning to the banking system with a week to 10 days time and that time you will obviously see banks borrowing from the RBI in the LAF window more often,” said Kumar Rachapudi, a fixed income strategist at Barclays Capital, Singapore.
“As long as banks have enough securities to borrow from the RBI from the LAF window, that will determine the amount of credit that can be disbursed to both public sector and to the government,” he added.
Mutual funds are also not too worried about the redemption pressure as these are anticipated outflows.
“Mutual funds are already having long term money... (they) anticipated this and have a lot of maturities coming up in September. So from a mutual fund perspective it can be managed,” said K Ramkumar, head of fixed income at Sundaram BNP Paribas Mutual Fund.
However, the pace of government spending will be the key to ease liquidity crunch given the onset of festive season in October.
“The market is now at decent levels and higher rates, the currency in circulation will also return to the system,” Nagarajan of Tata Asset Management said.