The Hindu Business Line : `IMD redemption impacted liquidity'

Liquidity conditions became tighter from mid-December 2005 due to India Millennium Deposits (IMD) redemptions, build-up of Government of India (GoI) cash balances and sustained credit growth.

Liquidity impact of IMD redemptions was about Rs 32,000 crore, according to a release from the Reserve Bank of India on Tuesday.

The average GoI cash balances with the RBI between December 2005 and February 2006 was higher by about Rs 18,000 crore compared to January-November 2005.

The credit-deposit ratio of the banking system stood at a high of 71 per cent as on February 17, 2006. Also, the incremental CD ratio has been more than 100 per cent for two consecutive years.

Since mid-December 2005, the injections through the Liquidity Adjustment Facility (LAF), the Market Stabilisation Scheme (MSS) unwinding and market operations have far exceeded IMD redemptions and the build-up in Government cash balances.

Average daily net injection through LAF repos was Rs 12,951 crore and MSS unwinding Rs 25,072 crore.

Besides, average daily refinance provided was Rs 2,208 crore. In addition, RBI's forex operations and private placement of dated G-sec of Rs 10,000 crore had a positive impact on liquidity.

The call money rates, which had generally risen since the IMD redemptions, have shown distinct signs of easing since last week of February 2006. The call money rate has averaged 6.60 per cent since February 25, 2006.

Under the short-term outlook, the repo volumes under LAF have declined to more neutral levels.

In March 2006, so far they have averaged Rs. 6,645 crore as compared to Rs 13,766 crore in February 2006.

Transient factors affecting market liquidity such as advance tax flows can put some pressure in mid-March, which, the release says, can be managed through RBI refinance or the repo window. Government spending, especially by the States, is expected to pick up.

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