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RBI open to 2nd repo ahead of key IPO if needed: sources

RBI open to 2nd repo ahead of key IPO if needed: sources
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First Published: Wed, Oct 13 2010. 05 10 PM IST
Updated: Wed, Oct 13 2010. 05 10 PM IST
Mumbai: The Reserve Bank of India (RBI) is ready to offer liquidity support measures in the form of a second repo window ahead of a large share sale by a government company next week, two sources in the central bank told Reuters.
The initial share sale of state-run Coal India is expected to raise as much as Rs15,000 crore ($3.5 billion), the largest in the country’s corporate history.
This has sparked worries of a crunch in the banking system after the cash outflow.
“We can open a second LAF (liquidity adjustment facility) window for banks if needed,” said a central bank source.
The government, which has a cash balance of more than Rs70,000 currently, can also opt to step up spending, he added. The share sale of Coal India, the world’s largest coal miner, is open through next week with listing in Mumbai set for 4 November.
“The IPO is so large that if a lot of money gets accumulated, then there will be imbalance in funds that is likely to drive up the call rate,” said R.V.S Sridhar, president and head of markets in treasury of Axis Bank.
Some traders had been expecting the central bank to announce a bond buyback to inject funds into the banking system, but sources said there was no such consideration in the pipeline.
“The issue is not only about tightness, but skewedness of liquidity,” said a treasurer at a foreign bank, adding that the system is already short by Rs40,000 crore currently.
“A bond buyback would have helped,” he said.
A central bank official, however, said a decision on bond buyback is to be taken by the government and is usually driven by cost considerations not liquidity ones.
A finance ministry official said the government is not contemplating any action to improve liquidity immediately.
“No action on the part of the government now but may be later,” said a government source on being asked whether there was any plan to draw down on its huge cash balance after the IPO.
The Reserve Bank of India on Wednesday lent more than Rs70,000 crore to banks for the third straight day through its repo window.
“I don’t think there will be a major problem on liquidity,” said one central bank source.
Banks are holding close to 28% of their deposits as government bonds, higher than the central bank requirement of 25%, meaning that the banks can use the additional securities to borrow through the bank’s repo window, he added.
“If we don’t intervene (in foreign exchange market), liquidity will just get reallocated to the banks who are arranging the issue,” he said.
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First Published: Wed, Oct 13 2010. 05 10 PM IST
More Topics: RBI | Repo Windo | Liquidity | IPO | Banks |