The Hindu Business Line : Tight liquidity conditions likely to ease soon

Bangalore, Nov. 14 Liquidity has tightened in the financial markets with the foreign institutional investors (FII) pulling out, but bankers say this is unlikely to last.

At the Liquidity Adjustment Facility (LAF) auction on Monday, there were 14 banks in the Repurchase window for raising Rs 9,100 crore, a departure from the past few weeks.

The repurchase window of the Reserve Bank of India extends liquidity support through purchase of securities.

At Tuesday’s LAF auction recourse to the RBI repurchase window was to the extent of Rs 23,100 crore.

Part of the tight liquidity situation stemmed from FIIs pulling out of the equity markets.

Net investments by FIIs were to the extent of $244.10 million since the beginning of the week, according to data from the Securities Exchange Board of India.

There were also other factors at work. Bankers said that another major reason for the liquidity tightening stemmed from arbitrage possibilities, with call money rates rising to 9 per cent early this week.

This was partly on account of the RBI’s siphoning out liquidity through the Market Stabilisation Scheme (MSS) and the 50 basis points increase in the Cash Reserve Ratio (CRR).

Arbitrage opportunity

Some banks had anticipated this situation and accordingly capitalised on the arbitrage opportunity which allowed them to raise funds from the repo window at 7.75 per cent and advance it in the call market at 9 per cent, a spread of 1.25 per cent.

As a result, at Wednesday’s 91-day Treasury Bills auction, the cut-off yield rose to 7.52 per cent, up 21 basis points from last week’s level of 7.31 per cent.

But this situation was unlikely to sustain, if the current downtrend in oil prices continued.

Signs of a reversal were evident at Wednesday’s LAF auction, when recourse to the repo window was just Rs 1,780 crore and there was only one bidder, as against 29 the previous day.

Hedge funds returning

Speaking to Business Line, IndusInd Bank’s Executive Vice-President, Mr J. Moses Harding, said, “We can see the liquidity overhang coming back in a few days.”

Part of this anticipation emerged from the unwinding of positions from international crude oil markets by global hedge funds.

The unwinding had resulted in international prices coming off the highs of $98 a barrel to $91 a barrel. The hedge funds are now likely to return to the emerging markets, said Mr Harding.

Besides, some of the treasury bills are expected to mature during the next few days, which could add to the liquidity overhang.

At least Rs 18,000 crore worth of 91 day T-Bills are expected to mature over the next few weeks.

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