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Liquidity measures to stabilize money market rates: bond dealers

Liquidity measures to stabilize money market rates: bond dealers
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First Published: Fri, May 28 2010. 12 31 AM IST
Updated: Fri, May 28 2010. 12 31 AM IST
Mumbai: The move by the Reserve Bank of India (RBI) on Wednesday night to ease liquidity pressures will keep money market rates in check and may even bring down bond yields, bond dealers say.
Banks can borrow up to 0.5% of their deposit base from RBI, apart from which they can borrow twice a day for four days using the so-called liquidity adjustment facility, or LAF.
Currently, LAF is conducted once a day except on Friday. Banks can borrow from RBI at 5.25% to take care of their temporary liquidity mismatches. If they have excess money, they can park that at the LAF window and earn 3.75%.
“These measures are ad-hoc in nature and the additional liquidity support under this scheme and the daily SLAF (second LAF) will be available with effect from 28 May and up to 2 July,” RBI said. This is a de-facto cut in the statutory liquidity ratio (SLR), or the portion of a bank’s deposits required to be invested in government bonds. Currently, banks need to invest 25% of their deposits in bonds. Now, they can bring it down to 24.5%.
The last time RBI cut banks’ SLR was in November 2008, to help them tide over an acute liquidity crunch following the collapse of US investment bank Lehman Brothers’ Holdings Inc.
The central bank had restored banks’ SLR to 25% by October 2009 as liquidity improved.
The latest relaxation will allow banks to borrow Rs21,000 crore from the central bank.
“It gives an impression to the market that RBI is always there to save banks, which is a positive sentiment,” said a bond dealer with a foreign bank, who did not want to be named.
Telecom companies that successfully bid for third-generation (3G) spectrum have to pay Rs68,000 crore to the government by Monday and the banks’ share in this is expected to be at least Rs45,000 crore. Besides, advance tax outflow is also expected to be in the range of Rs35,000-45,000 crore. Indian corporations pay income tax every quarter on their projected profit. If banks suffer from any liquidity crunch, they will have to access the overnight call money market to meet the demand for funds from telecom firms.
Call money rates rose to 4.25% on Monday after banks parked only Rs4,750 crore with the central bank. They are parking less money with RBI as liquidity is drying up.
The liquidity in the banking system has fallen to an average of Rs6,371.67 crore in the first three days of this week from an average of Rs52,197 crore per day till last week.
There are fears that demand from telecom firms and advance tax outflow will cripple the banking system and make call money rates shoot up. The concern was also evident in bond yields that shot up by 20-40 basis points across tenures in the last two days. The yield on the benchmark 10-year paper closed at 7.52% on Wednesday after dropping to 7.30% last week. According to bond dealers, the yields would have risen further without RBI’s latest measures.
“After these measures, I expect the call money rates to remain within a range of 3.75-5.25%,” said S. Raghavan, head of treasury at IDBI Gilts Ltd, a primary dealer that buys and sells government bonds. According to Raghavan, the bond yields should come down after Friday’s bond auction and should range at 7.40-7.55%.
The money markets were closed on Thursday on account of a religious holiday.
anup.r@livemint.com
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First Published: Fri, May 28 2010. 12 31 AM IST