The Hindu Business Line : Market stabilisation scheme not needed now?

Bangalore, July 28 Faced with a tight liquidity situation banks, both public and private, have begun pushing for discontinuing the market stabilisation scheme (MSS).

Top bankers said that the Reserve Bank of India’s MSS operation was worsening the tight liquidity situation and contributing partly to the rise in of interest rates. Tight liquidity was pushing banks to the RBI’s repurchase window. MSS operations have continued despite the slowdown from the beginning of this financial year in foreign portfolio investment flows into the country. Outstanding MSS securities currently are about Rs 1.71 lakh crore Rs 1.69 lakh crore at the beginning of this financial year. This was despite the 125-basis point increase in the Cash Reserve Ratio (CRR) that impounded over Rs 50,000 crore of liquidity this financial year so far. During the same period, FII flows remained in the negative zone. Since April this year, there had been a net FII outflow of $3.2 billion.

Hardening yields

Most of the MSS operations this financial year were conducted through Treasury bill route. Bankers said that even as some of the securities mature, fresh MSS issues of T-bills mopped up the liquidity released. As a result, the T-bill yields sharply rose by over 200 basis points. The yield on the 91-day T-bill in April this year was 6.94 per cent. At last week’s auctions, the yield was 9.06 per cent.

Bankers said the hardening of yields had come at a time when credit off take from the productive sectors of the economy was picking up. Consequently, yield increases at this juncture were likely to translate into higher lending rates, they said. . Moreover, at the current level of T-bill yields, most banks were already earning an average spread of about 2 per cent over their weighted average cost of working funds. As a result, incentive to lend to the risk weighted sectors would diminish, they added.

Borrowing costs

The increased yields have already pushed the costs of corporate borrowings. Corporate borrowing costs are currently close to the benchmark prime lending rate that range between 12.75 per cent and 13.25 per cent. Part of the fund raising even at current levels, bankers said, were in anticipation of further interest rate spikes, as the RBI stepped up the battle to contain inflation.

HSBC Global Research, India Watch bulletin, forecast that the CRR would be hiked by at least 100 basis points by December this year.

Besides, some of the credit drawdowns were intended for making prepayments of external commercial liabilities. This was because most corporates feared a further depreciation in the exchange rates in the coming weeks, due to decelerated foreign inflows.

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