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The banking system appears to be flush with liquidity due loan recoveries, government spending and lower credit demand, according to treasury officials.
With many banks having surplus liquidity, the daily borrowing under the Reserve Bank of India’s Liquidity adjustment facility (LAF) window has dropped to as low as Rs 7,695 crore (on July 5) as compared to the high borrowing levels of Rs 1-lakh crore in the February-March period.
LAF is a tool to modulate liquidity in the banking system. Banks borrow funds from LAF when they face liquidity crunch and deploy funds when they have surplus liquidity.
The borrowings under LAF stood at Rs 51, 065 crore on Tuesday, well within the RBI’s comfort zone of +/-1 per cent of the banking system’s Net Demand and Time Liabilities.
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According to P. Paramasivam, General Manager (Treasury), Corporation Bank, there is liquidity surplus in the system with the increase in recovery of loans taking place. “Also, credit disbursement momentum is yet to start. This has left banks with no requirement to borrow further,” he said.
In addition, government spending is adding to the inflow of money into banks, resulting in enough liquidity.
Says Dhawal Dalal, Head-Fixed Income, DSP BlackRock, “Government spending has augmented liquidity due to which banks have reduced their daily borrowings.”
Since the RBI is intervening in the forex market by selling dollars (to support the domestic unit), the ensuing rupee liquidity is adding to the banking system’s liquidity.
The decline in LAF borrowing could also be attributed to the fact that borrowing through Collateralised Borrowing and Lending Obligation (CBLO) route at an interest rate of about 6.8-7 per cent is cheaper than the repo rate which is at 7.25 per cent at present.
Easing liquidity combined with a falling rupee has further ruled out an interest rate cut by the RBI in its First Quarter Review of Monetary Policy 2013-14 on July 30, said another treasury official.
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