Mumbai: Bankers and bond dealers do not see any immediate relief from the liquidity squeeze that prompted the Reserve Bank of India (RBI) to infuse Rs90,000 crore on Monday into the domestic financial system even as the rates in the interbank call money market, from where banks borrow from each other to tide over their short-term asset-liability mismatches, rose to 16%.
While RBI has been injecting an average of Rs65,000 crore every day since mid-September, the infusion of Rs90,075 crore on Monday was largely due to the semi-annual bank closing on Tuesday, when banks need extra money to improve their cash positions.
Foreign exchange and bond dealers are prepared for a situation where money is scarce.
“I think we have to face this tight liquidity till mid-October. By that time government spending will begin and money should start coming back to the system,” said S. Srinivasa Raghavan, vice-president and head, treasury, IDBI Gilts Ltd, a primary dealer that buys and sells government bonds.
Apart from salaries to its employees, due this week, the government is also expected to pay its employees part of their salary arrears in accordance with the Sixth Pay Commission’s recommendations.
According to bond dealers, a combination of factors has led to the liquidity crunch.
The advance tax payments of about Rs40,000 crore made by banks and corporations have not yet flowed back into the system. Besides, foreign institutional investors (FIIs) have been selling local stocks and buying dollars, causing the dollar to appreciate considerably against the rupee. FIIs have sold stocks worth more than $9.3 billion (Rs43,617 crore) since the beginning of the year, net of buying, the highest since India opened the doors for foreign investors in 1993. RBI has been selling dollars to stem the fall in the local currency which has lost more than 16% against the greenback since January.
Following RBI’s dollar sale, India’s foreign exchange reserve that stood at $316 billion in May fell to $291.97 billion in mid-September.
The rupee crossed 47 to the dollar on Monday and touched a five-year low of 47.12 before closing at 46.97. For every dollar RBI supplies in the market, an equivalent amount of rupee goes out of the system.
The scenario was very different last year with the Indian central bank buying dollars from the market to mop up the capital flow, as FIIs were pouring money into Indian equities. For every dollar it bought, RBI infused an equivalent amount of rupee, leading to an unprecedented growth in money supply.
“The tight liquidity will continue for sometime. It’s a part of the global deleveraging process in emerging market investments,” said Mohan Shenoi, head of treasury at Kotak Mahindra Bank Ltd.
A Rs10,000 crore bond auction on 26 September, which was not part of RBI’s auction calendar in the first half of fiscal 2009, has also added to the liquidity squeeze. RBI is again slated to auction Rs7,000 crore worth of government bonds on Wednesday. In the third quarter, between October and December, RBI will auction Rs39,000 crore of bonds.
The government has so far this fiscal borrowed Rs1.06 trillion, against the annual target of Rs1.45 trillion.
According to R.V.S. Sridhar, senior vice-president, treasury, at Axis Bank Ltd, advance tax outflow typically returns to the system by the end of the month, but that hasn’t happened this time, forcing banks to rush to RBI for short-term liquidity support.
Banks get RBI support, offering their excess government bond holding as collateral. Under statutory liquidity ratio (SLR) norms, banks are required to invest 25% of their deposits in government bonds. If they have excess SLR holdings, they can use them to get liquidity support from RBI. Or they need to borrow from the interbank market.
“The tight liquidity will ease gradually. But for sure, it won’t be worse than this,” said Joydeep Sen, vice-president, advisory desk of BNP Paribas India, adding that the squeeze is nothing to worry about.
“RBI also wants a tight liquidity situation to control inflation, its main focus now.”