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Dissecting the liquidity crunch

Dissecting the liquidity crunch
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First Published: Sun, Nov 09 2008. 10 15 PM IST

Updated: Sun, Nov 09 2008. 10 15 PM IST
The Reserve Bank of India’s (RBI) latest weekly statistical supplement shows some rather strange trends. It shows a sharp drop in credit growth during the fortnight ended 24 October to Rs7,637 crore, compared with a huge Rs64,937 crore growth during the previous fortnight.
At the same time, growth of investments in government securities rose by a massive Rs71,317 crore during the fortnight to 24 October, compared with negative growth of Rs6,324 crore in the previous fortnight. As a matter of fact, the increase in scheduled banks’ holdings of the statutory liquid ratio (SLR) securities this fiscal year has gone up by Rs80,519 crore till 24 October, of which Rs71,317 crore was invested in the fortnight to 24 October. As a result, the investment-deposit ratio for all scheduled commercial banks, which was 28.27 on 10 October, went up to 30.18 on 24 October.
What happened during the fortnight ended 24 October? The clue lies in the banks’ balances with RBI. These came down drastically by Rs1,08,399 crore during the fortnight to 24 October due to cuts in cash reserve ratio, the percentage of deposits banks have to keep with RBI. Most of this was parked in government securities.
Also See Fear Of Lending? (Graphic)
Interestingly, banks also invested in corporate commercial paper (CP) in a big way—CP outstandings went up to Rs15,517 crore on 24 October, from Rs10,610 crore on 10 October. That surge is probably the result of the high interest rates on CP at that time.
An indication of the surge can be seen from the fact that while these ranged between 9.5% and 12.25% in the fortnight ended 15 July, the range had gone up to 11.9-17.75% in the fortnight ended 15 October.
Much depends on whether the banks’ decision to park the funds in government securities was deliberate, or whether they just didn’t have time to lend it out and the next few weeks will see the money being lent out. There are signs, however, that the liquidity crunch is easing—three-month Mibor (Mumbai inter-bank offer rate) came down to 11.42% last Friday against 12.07% the previous Friday. The 14-day Mibor has fallen far more.
But all that means is that banks have enough liquidity. For companies to benefit, they have to start lending instead of hoarding cash in government paper.
Write to us at marktomarket@livemint.com
Graphics by Paras Jain / Mint
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First Published: Sun, Nov 09 2008. 10 15 PM IST