Mumbai: Ample cash surpluses in the Indian banking system will start draining out only next year as bank lending picks up and growth prospects start to brighten, even as government debt sales loom ahead, analysts and traders say.
The Reserve Bank of India (RBI) will also move to a neutral policy stance marked by lower cash surpluses from an easy stance currently where banks routinely park more than Rs1 trillion with the central bank (RBI) at its daily money market auctions, they added.
“In the second half of the current fiscal year, I expect the credit off-take to improve and the cash surplus coming down, said S. Srinivasa Raghavan, treasury head at IDBI Gilts Ltd., adding that sentiment has improved after the Congress-led coalition’s decisive election victory this month.
A sharp slowdown in bank lending, amid an economic downturn, coupled with a spate of rate reductions including cash reserve requirements, increased money surplus, pulling the overnight rate down from 17% in October to 3% now.
Average daily cash mopped up by the central bank in May has swelled to a record Rs1.32 trillion from Rs477.2 billion in January, an indicator of ample cash levels.
But now, economists see rising confidence among banks to lend going hand-in-hand with a rebound in economic activity in the second half of the current fiscal year, stoking credit demand and draining excess cash with banks.
The central bank may also switch to an inflation-fighting mode from growth mode in the latter half of the year and then open to a more neutral stance by withdrawing excess liquidity, said Sailesh Jha, an economist at Barclays Capital.
Bank loan growth has dropped sharply from average rates of around 30% in recent years to around 17% in the first week of May. The Reserve Bank of India (RBI) pegs loan growth at 20% for 2009-10.
RBI will start by issuing market stabilization bonds to drain cash in the fourth quarter of 2009 and follow that up with a cash reserve ratio hike of 100 basis points, followed by rate hikes in 2010, predicts Sonal Varma, an economist with Nomura Financial Advisory and Securities (India) Pte Ltd.
In any case, the Rs1 trillion cash surplus dwarfs in comparison with a budgeted bond sale target of Rs3.6 trillion this year, senior traders say, and some expect this number to rise when the new government announces its budget by July.
India’s consolidated deficit has already topped 10% of GDP in 2008-09, among the highest in the world, and may widen further this year. Nomura’s Varma expects the borrowing plan to swell to Rs4 trillion.
The government has already surpassed its scheduled borrowing in May, raising Rs540 billion, versus the targeted 480 billion and finance ministry and central bank officials are meeting this weekend to finalize a revised calendar until September.
“The RBI will start implementing exit strategies from its unconventionally loose monetary policy as early as fourth-quarter of 2009, forced by inflationary worries, with the initial focus on liquidity management, ” said Varma.