New Delhi: The Indian government has a cash balance of around Rs480 billion with the central bank currently and will spend it gradually rather than at one go, three sources with direct knowledge of the issue told Reuters.
The Reserve Bank of India (RBI) is ready to expand liquidity support to the system if the need arises, a source said late on 8 June, adding that the bank has its own estimate of the expected outflow as a result of advance taxes as well as payment towards the broadband wireless access (BWA) spectrum. “Well, let’s see how the situation evolves....there could be more liquidity support given.....the window itself could be expanded.....but we’ll see as the situation evolves,” the source said.
Concerns of cash tightening sharply during this period has surfaced despite the RBI allowing banks to borrow an additional 0.5% of their deposits from the central bank through the daily liquidity support window till 2 July due to the slow pace of government spending.
Traders in the bond market are expecting about Rs300 billion to flow out of the system as advance tax payment on 15 June and another Rs350 billion through BWA spectrum sale at the same time.
“The govt has a largish positive cash balance ...it takes time to pump back money into the system....we are aware of the liquidity squeeze but I think the pumping back will be gradual rather than one go,” a finance ministry official told Reuters. Telecom companies paid Rs677 billion to the government towards auction of third-generation (3G) mobile spectrum on 31 May. This led to a sharp rise in the government’s surplus balance with the Reserve Bank of India (RBI).
About Rs300 billion of this money may be used to repay the government’s loans from the RBI under Ways and Means Advances, a central bank official told Reuters on condition of anonymity.
“I dont think it’s a structural issue, the liquidity mismatch is temporary in nature and in opening the LAF window all these have been built in - the redemptions, the 3G outflows as also the advance tax outflows but we are sure the mismatch can be addressed,” another source said.
Spending of cash surpluses by the government will bring the money back to the banking system, easing the current liquidity tighteness which pushed the overnight money rates to over 5% from 3.75% two weeks ago.