The effect of the improving liquidity is that banks have started cutting deposit rates by up to 50 basis points in select maturities.

With the liquidity situation easing since the beginning of this month, banks’ borrowing from the Reserve Bank of India is expected to come down considerably, say senior bank treasury officials.

That the liquidity situation has improved is underscored by the fact that banks’ borrowing at the central bank’s liquidity adjustment facility window has come down over the last week, from Rs 1,20,965 crore on April 2 to Rs 28,800 crore on April 5.

Though banks collectively borrowed Rs 1,09,365 crore on Monday, bankers say the liquidity trend is towards easing as outflows on account of advance tax payment by companies last month is expected to come back into the banking system.

The effect of the improving liquidity is that banks have started cutting deposit rates by up to 50 basis points in select maturities. Among the banks that have cut deposit rates are HDFC Bank, Bank of Baroda, Oriental Bank of Commerce, and Syndicate Bank.

Moreover, the RBI, in its mid-quarter review of monetary policy in March, had indicated that in case of liquidity tightness it will conduct open market operations — buy government securities to infuse liquidity into the banking system. This operation will further reduce banks’ daily borrowings.

According to Mohan Shenoi, President, Group Treasury, Kotak Mahindra Bank, “Banks’ borrowings from the RBI have reduced due to liquidity easing on account of government spending. The liquidity deficit may stay in the range of Rs 50,000-70,000 crore in the month ahead.”

The central bank's comfort zone for daily borrowings under the Liquidity Adjustment Facility (LAF) is +/- 1 per cent of total deposits in the system. On account of advance tax payments and year-end pressure banks’ net borrowings in March was over Rs 1-lakh crore almost every day.

S. Srinivasaraghavan, Executive Vice-president and Head of Treasury, Dhanlaxmi Bank said, “Banks’ borrowings will be around Rs 60,000-70,000 crore as the Government has started spending. So, the liquidity tightness has relatively eased for banks.”

Beena.parmar@thehindu.co.in

Deepa.nait@thehindu.co.in

(This article was published on April 8, 2013)
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