S. Balakrishnan

The auctions of the 3G and Wimax spectrums were a huge success. Bids topped estimates. It was a windfall for Government.

A sorely needed one, though. Tax revenues are rising, but spending is rising even faster. Government finances are, therefore, in bad shape. The income from the spectrum auctions is an unexpected bounty for the long suffering fisc.

Calculating that Government would need to issue fewer bonds, markets pushed down 10-year yields from the neighbourhood of 8 per cent to 7.4 per cent. This despite inflation being uncomfortably high and the latest GDP growth estimate being well over 8 per cent. Stock markets are back in bull territory after a brief fall at the height of the EU crisis.

Hence, it is hardly bond-positive all round.

Money rates have shot up in the last week or so, from the region of three per cent to over five per cent. For, the counterpart of Government's bulging coffers, post-auction, is the exit of that much liquidity from the banking system, certainly in the short-term.

Banks, which were lending in the tens of thousands of crores of rupees to the RBI in the daily liquidity adjustment facility, now have hardly any funds to spare. It's a sea change from the situation of just a couple of weeks ago.

Fearing a liquidity crunch in the market, the RBI has opened emergency windows to aid banks caught short. They can borrow from the central bank up to a (small) fraction of their deposit liabilities with no SLR obligation. The incremental liquidity is entirely available for asset-liability management.

The RBI's signal is clear. It doesn't want a spike in money rates. One of its (several) laudable steps in recent years is (enormously) reducing volatility in money markets, which, earlier, used to see call rates jumping and staying at levels of 20 per cent and thereabouts even when repo rates were far lower. Extended periods of low rates well below policy were also not uncommon. Of what significance is a benchmark if market rates do not converge somewhere near?

With the pressure off the budget, the RBI should have far more leeway to manage system liquidity and Government borrowing, without having to resort to strong measures (i.e., intra policy review moves) to quell inflation.

One dare says that the Central Bank is satisfied with the current range of money rates in the vicinity of 5-6 per cent, considering the current growth-inflation mix.

The spectrum auctions have achieved what monetary policy could not.

(This article was published in the Business Line print edition dated June 2, 2010)
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