The Hindu Business Line : Bids at auction down to 7 on tight liquidity

Signs of the tightening became evident today, from the number of bids at the liquidity adjustment facility (LAF) auction shrinking to just 7. The 7 participants’ recourse to the Reverse Repurchase window of LAF was for a gross amount of Rs 12,035 crore.

Last weekend, the recourse to the Reverse Repo window was Rs 30,650 crore and there were 25 bids. Reverse Repurchase involved removal of liquidity from banking system. The concentration in liquidity in a few banks was largely on account of funds raised by some of them during the last few weeks and Central funds, awaiting disbursal to the States.

The ING Vysya Bank’s Chief Economist, Mr Harish Menon, said: “This is a sign of an imminent liquidity tightening.” In fact, anticipating such a situation, some of the major banks had put on hold their plans for a downward revision in deposit rates. Instead public sector banks have gone for tweaking deposit rates in the middle and long ends for mobilising resources.

Aggressive operations

Bankers said that the one of the major factors that has contributed to the tightening of the liquidity in the financial markets was the aggressive RBI open market operations.

The outstanding market stabilisation scheme (MSS) securities with the RBI are currently about Rs 86,000 crore, in the form of Treasury Bills and dated securities. This is in addition to the Government borrowings for the current year estimated at Rs 1.09 lakh crore of which about 70 per cent has already been completed.

In addition, the cash reserve ratio (CRR) hike to 7 per cent has removed about Rs 14,000 crore from the banking system, the impact of which was now being felt in the banking system.

Compounding this situation, bankers said was the slowdown in the foreign exchange flows, particularly portfolio investments from foreign institutional investors. This month, so far, gross sales by FIIs exceeded Rs 50,000 crore and net investments were in the negative zone by Rs 9,200 crore.

Ye, despite this impending liquidity crunch, the 10-year yield-to-maturity is down to 7.91 per cent after having topped 8 per cent last weekend.

Deposit Growth

However, part of the yield softening was largely on account of deposit accretion in the banking system. Bankers said that deposit growth was in excess of 25 per cent.

Consequently, there was demand for the Government securities for maintaining statutory liquidity ratio of 25 per cent.

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