Cash tightness easing in a month: Rangarajan

Cash tightness easing in a month: Rangarajan
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First Published: Thu, Nov 11 2010. 01 23 PM IST
Updated: Thu, Nov 11 2010. 01 23 PM IST
New Delhi: The current tight liquidity situation in India is temporary and is expected to ease in a month’s time on government spending, C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said on Thursday.
Cash conditions have remained tight since last month on tepid government spending, and increased bank withdrawals ahead of the festive season.
“As you know in the second half of the year public expenditure also increases, therefore this liquidity tightness which is felt now may be temporary,” Rangarajan said.
Banks borrowed Rs 75, 565 crore ($17.5 billion) at the morning repo auction compared with nearly Rs 1.2 trillion at the central bank’s twin repo auctions on Wednesday.
Rangarajan also hinted at the possibility the central bank will intervene in the foreign exchange market amid robust capital inflows, which may in turn create some rupee liquidity.
“Also, if part of capital flows are absorbed by reserves then that will expand liquidity also,” Rangarajan said.
India’s central bank on Tuesday reintroduced measures to provide liquidity comfort to banks, arising out of the frictional liquidity pressure, but unlike the previous time, did not announce any open market bond purchases.
However, markets did not cheer the Reserve Bank of India’s (RBI) recent measures, as there was no effective liquidity injection per se.
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The interbank cash rate had shot up to 12% on 29 October with cash tightness aggravated by Coal India IPO refunds, but subsequently cooled off after the RBI’s first round of cash support measures.
However, the overnight rate has been hovering around 7-7.25% this week, much above the RBI’s repo rate of 6.25% and the benchmark 10-year bond yield revisited over one-week highs of 8.09% on Thursday.
The one-year overnight indexed swap also reflected the cash strain with the rate rising to 6.78 percent, its highest since 28 October.
“All the measures will only lead to higher borrowing either from the market or from RBI, but effectively there is no reduction in the tightness,” said a dealer at a foreign bank.
RBI sources say government’s surplus cash balance is around Rs 80, 000 crore ($18 billion), indicating the lack of adequate spending. The market is hoping the central bank will buy bonds through a second round of open market operations (OMO) to ease cash tightness, or for the government to postpone part of its borrowing plan. In the first round of its recent OMO auction on 4 November, the RBI bought Rs 8, 352 crore of bonds against its target of Rs 12, 000 crore.
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First Published: Thu, Nov 11 2010. 01 23 PM IST