The Hindu Business Line : `IMD redemption triggered liquidity pressure'

THE recent tightening of liquidity in the banking system was due to currency demand in the festival season, scheduled auctions, advance tax outflows and redemption of India Millennium Deposits (IMDs) amidst a sustained growth in credit demand, the RBI said in its Macroeconomic and Monetary Developments for the third quarter.

To lessen the liquidity pressure, RBI injected on an average Rs 1,094 crore daily into the market through repo operations during November 9-18, 2005 and cancelled auctions of treasury bills under the Market Stabilisation Scheme (MSS) from November 16, 2005.

Liquidity pressures again emerged from the second week of December 2005 and the outstanding balances under the Liquidity Adjustment Facility's reverse repos started coming down. The pressures increased further as advance tax outflows coincided with the redemption of the IMDs. In connection with IMDs, RBI sold foreign exchange of $7.1 billion to SBI during December 27-29, 2005 against the equivalent rupees (Rs 31,959 crore). Reflecting the liquidity conditions, call rates remained above the repo rate during the second half of December 2005.

Commercial banks' borrowing from RBI also increased from October-end to mid-January 2006 (Rs 2,089 crore), reflecting the liquidity conditions. Keeping in mind the liquidity condition, RBI decided on December 30, 2005 to suspend the issue of T-billsand dated securities under the MSS.

Banks met the rising demand for commercial credit by restricting their incremental investments in Government papers. Demand deposits continued with their rapid growth for the second successive year, mirroring the sustained pick-up in non-food credit and a buoyant primary capital market, with funds getting temporarily parked in demand deposits.

As on January 6, 2006, demand deposits were at Rs 3,39,271 crore, an increase of 28.2 per cent. Time deposits increased by 14.8 per cent to Rs 17,92,644 crore. Credit pick-up during April-October 2005 was led by agriculture, industry and housing.

In addition to bank credit, a strong flow of non-bank funds to the corporate sector continued during the third quarter. Resources raised from ADR/GDR issues during Q3 were almost five times the previous quarter.