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Thursday, Mar 25, 2004

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RBI repos see Rs 55,475 cr sucked out

Our Bureau

Bangalore , March 24

THE Reserve Bank of India (RBI) has set a new record in mopping up excess liquidity through repurchase operations.

On Wednesday it mopped up a record Rs 55,475 crore, through one-day repo auctions. Today's mop-up comes after Tuesday's intervention when the RBI sucked out close to Rs 54,000 crore.

Repos or repurchase operations are short-term liquidity correction operations, where the RBI places securities from its holdings with banks.

Bankers said the deluge was on account of the government's move to redeem maturing securities rather than refinance them as in the past. This had resulted in flooding the market with at least Rs 15,000 crore.

The liquidity surge was also aided by the finalisation in allotment for some of the high profile initial public offerings. Since the issues were made through the book-building route, institutional investors need to bring their funds only at the time for allotment.

Among the foreign investors who have now brought in investments include entities of the Singapore Government, which had also put in their bids for some of the PSU offerings.

In addition, liquidity was also being contributed by the repatriation of external commercial borrowings by some top corporates such as Reliance Industries and Bharti Airtel for funding their capital expenditure. This was in addition to the large-scale current account inflows.

Besides, more non-resident Indians have also been remitting funds back into the country into non-repatriable domestic deposits, bankers said. All these flows have resulted in a step-up of the average daily inflows to close to about $ 300-350 million per day as against $220-250 million two weeks ago.

The inflows prompted panic selling of dollars by exporters, which has resulted in the rupee appreciating by one per cent against the dollar since the beginning of the week.

With exporters selling, the RBI has been intervening aggressively in the forwards markets to support the forward premiums at current levels. Forward premiums are currently in the region of about 0.55 per cent for 12 months.

Bankers expect the liquidity situation to worsen in the coming months. This was because more such redemptions were expected in the coming weeks.

Among the securities coming up for redemption is the 11.50 per cent 2004, in May. Such a liquidity surge is also likely to exert pressure on interest rates.

Canara Bank General Manager (Investments), Mr K.V. Hegde, said: "This trend of redemption will bring further downward pressure on interest rates."

Besides, there is widespread expectation that the government's borrowing programme for the next fiscal year is likely to be at least Rs 30,000 crore lower than this year. This programme would also include the planned bonds for the market stabilisation scheme. This instrument was originally expected at the time of the securities redemptions.

In fact within the banking sector some historical trends are likely to be reversed. In fact, the next year's borrowing programme is expected to pave the way for bringing down net bank credit to the government lower than the net bank credit to the commercial sector.

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