Financial Daily from THE HINDU group of publications
Friday, Aug 05, 2005
Financial Daily from THE HINDU group of publications Friday, Aug 05, 2005 |
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Money & Banking
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Govt Bonds Excess liquidity evident from reverse repo mop-ups C. Shivkumar
Bangalore , Aug. 4 THE slew of initial public offerings during the last few weeks has increased the liquidity overhang in the banking system. Banking sources said that at any point of time the liquidity overhang was only about Rs 20,000 crore. However, during the last few weeks, the liquidity was far in excess of this amount. The high liquidity was evident from the Reserve Bank of India's reverse repo auctions (where the RBI sells securities for removing liquidity). At the auctions held on Thursday, the liquidity mopped through the reverse repos was Rs 45,000 crore. On Wednesday, the mop-up amount was Rs 50,000 crore, the highest figure during the current financial year. The high liquidity also resulted in a sharp drop in the yields at the Treasury bill auctions. The 91-day T-bill auctions saw the yields drop to 5.32 per cent on Wednesday. Two weeks ago, the yields were at 5.44 per cent. Last week, the T-bill auctions were cancelled in view of the floods in Mumbai. Bankers said that the excess liquidity was also partly driven by the release of funds from some of the Ministries. These funds were parked in the reverse repos till such time drawals begin. Since most of the parking of the funds are done in current accounts investing the same in reverse repo auctions would fetch five per cent returns. Besides, bankers said there was sudden pick up in foreign currency inflows, partly by way of foreign institutional investments and for investments in the IPOs. Inflows through such sources were in excess of $100 million per day, bankers said. All the IPOs that came during the last few weeks witnessed phenomenal response from both domestic and international investors. The inflows also triggered intervention by the RBI to ensure exchange rate stability at 43.51 to a dollar. The intervention also contributed to the escalation in the liquidity overhang, since dollar purchases resulting in infusion of rupee liquidity into the markets. As a result of the inflows, bankers said that even the spikes in international oil prices failed to impact the markets. Bankers said that the situation is likely to continue for some more time till the IPO allotments are completed and the refunds begin during the month. Since most bankers anticipate that the funds were only short term in nature, most of them preferred to park either in repos or in highly liquid treasury bills. Most bankers abstained from parking funds in long-term securities on account of high credit offtake.Bankers said that if the credit offtake continued at the current growth pace of 25-30 per cent more banks would remain net sellers putting pressure on yields. Besides, bankers said that there was little scope for yields to soften since most of them already had an investment-deposit ratio of 41 per cent against the stipulated statutory liquidity ratio of 25 per cent.
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