Mumbai: Liquidity is likely to tighten in India’s money markets in mid-March, although not as acutely as last year when a cash shortage caused a big spike in overnight rates, JP Morgan said in a research note.
The liquidity shortfall could be around Rs70,000 crore ($17.5 billion) in March, the end of India’s fiscal year, although inefficiencies in the banking system could see a peak shortage of up to Rs1,00,000 crore, JPMorgan economists said.
The Reserve Bank of India would face difficult choices about how to respond to any such tightness, but it was unlikely to cut either the cash reserve ratio or the statutory liquidity ratio as the cash shortfall was likely to be only temporary, they said.
The amount of available cash in the market can be volatile in second half of March due to unexpected and sizeable variations in the central and state governments’ cash balances with the central bank and capital inflows, the economists said.
Advance tax payments drain liquidity out in the middle of the month, but then government spending tends to pick up in the final week, helping conditions. JP Morgan estimates this month’s tax outflow at Rs60,000 crore.
“Still, the brief period of tight liquidity — lasting around 10 days — can experience a marked rise in overnight rates. A good case in point is March 2007, when overnight call market rates spiked to 75%,” they wrote.
Call money stood at 6-6.1% on Tuesday, 11 March, unchanged from Monday’s close. The central bank’s main short-term lending rate is 7.75%. JP Morgan said this year banks were better placed to access funds from the central bank’s liquidity window, as they now had more excess holdings of government bonds to post as collateral.