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Radhika Menon
Shobha Kannan

Mumbai, Nov 9

The excess supply of funds is expected to continue, despite the recent measures announced by the Reserve Bank of India to mop up the surplus, say analysts and bank treasury managers.

After the 50 basis points hike in cash reserve ratio, which comes in to effect from November 10, the central bank on Wednesday hiked the MSS (market stabilisation scheme) limit by Rs 50,000 crore to Rs 2,50,000 crore.

Senior treasury officials feel that these measurers may not be able to contain the flood of liquidity as the strong FII inflows will force the RBI to intervene, thereby, creating more rupee funds.

The CRR hike is expected to mop up about Rs 16,000 crore. The increase in MSS is also expected to suck out some cash. This may result in temporary tightness but will not be adequate enough to stem the impact, if the current level of inflows continues, said a forex dealer.

“There could be marginal tightness in liquidity in the short term because of the CRR hike. However, increase in government spending, slow-down in credit growth and more investment in the stock market will, aid the building up of liquidity,” said Mr K Harihar, Head Treasury, Development Credit Bank.

The slowdown in credit offtake coupled with the increase in deposits have also left banks with surplus cash.

For the fortnight ended October 26, the net bank credit has grown by Rs 6,704 crore while the deposits have shown a strong growth of Rs 19,921 crore.

However, there has been a bout of volatility in the recent days with liquidity touching as high as Rs 30,000 crore on some days and as low as Rs 3,000 crore.

While the average surplus cash that banks parked with the RBI (through reverse repo) during October 22-26 was roughly about Rs 30,000 crore on a daily basis, the situation was different between October 29-November 8, with the figures changing almost everyday.

Bond dealers say that they were finding it difficult to trade with no clear assessment of excess cash in the system. “Trading in the bond market is based on our assessment of liquidity and this we are no longer able to do. As we move towards fuller capital account convertibility, such volatility may, however, become the order of the day,” said a bond dealer.

Market participants feel that the call rates could also go up to 7.75-8 per cent in the short term as CRR hike and auctions could drain away some surplus cash. There could be some outflow of about Rs 8,000-10,000 crore, as people withdraw cash during the festive season, said a dealer with a private bank.

Dealers, however, feel that this would be a temporary phenomenon and given the huge liquidity in the system, call rates would again come back to the current range of six per cent.

More Stories on : Financial Markets | CRR & Bank Rates

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