Mumbai: Indian policymakers are likely to effectively manage the cash crunch in the banking system, but may allow short-term rates to stay high, helping address inflation concerns, a senior treasury official at a foreign bank said.
The banking system is facing a cash shortage after an expected Rs1.36 trillion outflow in late May and June towards 3G spectrum payments, advance taxes and broadband access sales, lifting the overnight rate to the central bank’s lending rate.
“We would probably see pretty strong government spending in the next two months,” said Anindya Das Gupta, director and head of treasury, Barclays Bank.
In a bid to ease the cash crunch, the central bank on 26 May raised the limit on bank borrowing under its repo facility and began conducting a second repo auction everyday until 2 July.
“It is also likely that the central bank extending its recently announced ad hoc measures,” he added.
The bank expects the pace of government spending to be as high as Rs60,000 crore a fortnight, ensuring comfortable liquidity before the central bank monetary policy review on 27 July.
Cutting down the size of July T-bill issuance would be another possible measure, if things did not materialize on the spending front, he added.
The government is sitting on a cash surplus and “outstanding securities of one-month and two-month does not really make sense,” Gupta said.
The bank, however, does not see a reduction in the size of dated securities to be sold, at least in the fiscal first half.
“Structurally, on the longer end, they need to borrow as noone is sure how things go toward the end of the year. If they need to cut down borrowing in dated securities, they can always adjust it towards the year end.”
Higher rates in the inter-bank call money, commercial papers (CPs), certificates of deposit (CDs) and overnight indexed swaps (OIS), as a result of tighter liquidity may indirectly serve the purpose of a rate hike, at a time when the headline inflation crossed the psychological 10% mark, Gupta says.
“We have already seen the (call) rates have risen by more than 150 basis points. Now I don’t think we need a rate hike urgently just to give a signal,” Das Gupta said.
Fears of a mid-policy rate hike after a stronger-than-hope factory output growth and a sharp rise in the May wholesale price-based inflation sending short-term swap rates sharply higher.
At 5.4% on Wednesday, the one-month OIS rate was 140 basis points above its early May low. The one-year rate rallied by around 70 basis points by then.
“But by July policy, we could see a 50 basis point hike in repo and reverse repo rates, which is justified by the latest inflation and industry data.”
A third of the economists in a Reuters poll on Tuesday expect the central bank to raise rates before 27 July, compared with a quarter in a similar survey last week.
On Tuesday K.C. Chakrabarty, a central bank deputy governor, said inflation is a bigger concern than the situation in Europe and the finance minister toned down earlier remarks to back the bank over taming inflation.