Cash crunch may ease but interbank overnight rate seen firm

Cash crunch may ease but interbank overnight rate seen firm
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First Published: Wed, Mar 21 2007. 04 25 PM IST
Updated: Wed, Mar 21 2007. 04 25 PM IST
A cash crunch in the Indian banking system may ease in the coming days as government spending picks up, but the interbank overnight rate that soared to a more than nine-year high on 20 March will stay above normal.“The ministries, departments will start spending so liquidity will ease,” P.Chidambaram told reporters
This is because the central bank will maintain a tight leash on cash to fight inflation, which has stubbornly remained well above 6% against a target range of 5-5.5% by end-March, traders said.
The overnight cash rate, the rate at which banks lend funds to each other, was quoted at 70% on 21 March — the highest since 1996, dealers said. It had ended at 45-55% on 20 March, much higher than 6% when cash is ample.
“At best, it will come down to 8-9%,” Mahendra Jajoo, fund manager at ABN AMRO Mutual Fund said. “Loan growth is still averaging 30% and keeping cash tight by way of further bond issues would dampen inflationary pressures.”
Cash in the banking system shrunk sharply in recent days after quarterly tax payments of an estimated Rs300 billion ($6.8 billion), and resumption of bond sales under market stabilisation scheme (MSS) by the central bank after 18 months.
The squeeze, exacerbated by worries of a state-run bank strike next week, also helped propel the rupee to a 19-month high of Rs43.50 to the dollar in late afternoon trade as traders sold the dollar to free up funds as banks sought to meet their daily requirements.
Traders estimate outflows of Rs300 billion ($6.8 billion) from banks after companies withdrew funds to pay advance tax ahead of the financial year-end on 31 March.Indian firms and some individuals pay part of their annual taxes in advance every quarter to avoid a bunching of payments.Firms pay 30% of their annual tax bill in September, after having deposited 15% in June. They pay another 30% in December and remaining 25% in March.
Traders said big state-run banks, which are usually lenders, were among the borrowers on 20 March as they rushed to raise funds to meet regulatory requirements.The central bank pumped Rs353 billion into the banking system on 20 March through its daily repurchase auctions. It was the biggest injection of funds since late December, indicating the extend of cash shortfall.
However, the pressure on the availability of funds is expected to ease as government spending rises by end-March, traders said.
The Reserve Bank of India is scheduled to sell Rs20 billion of MSS bonds on 22 March, after draining Rs80 billion over the previous two weeks.The spike in overnight rates was because banks wanted cash to meet a regulatory requirement of having at least 25% of their deposits in government securities, traders said.
“A significant increase in the deposit base of the banking sector in the past couple of months has not been accompanied by an increase in bond holdings prompting some to access the unsecured markets,” said Hitendra Dave, co-head of global markets at HSBC India.
Total deposits with banks grew 24.8% to Rs24.93 trillion in the year to 2 March, up Rs427.16 billion from two weeks earlier, central bank data showed.
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First Published: Wed, Mar 21 2007. 04 25 PM IST
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