Money & Banking

Liquidity crunch for banks likely to ease up

G. Naga Sridhar N. S. Vageesh Hyderabad/ Chennai | Updated on March 17, 2011

The liquidity crunch for banks may soon ease, even as the RBI hiked the repo and reverse repo rates by 25 basis points on Thursday.

“Liquidity is not an issue. Banks are borrowing from the RBI and putting funds in MFs. This should further ease out,'' Ms Renu Challu, Managing Director, State Bank of Hyderabad, told Business Line.

A senior official of Andhra Bank said the liquidity needs of banks might come down as credit growth in the first quarter of the next fiscal is generally not high.

The liquidity position in the money market has been tight recently. The RBI says the crunch has eased a bit compared to the levels seen in January and February, when average injections through repos were of the order of Rs 93,000 crore and Rs 79,000 crore.

On Wednesday, the liquidity crunch flared up once more with about Rs 1,33,000 crore borrowed in the repo window.

A senior treasury official in a public sector bank said this crunch was due to the advance tax outflow during the past few days.

Asked when it would come back into the system, he said it may take a few more days or even weeks.

Normally, the money returns within four to five days after the advance taxes deadline, when the Government starts spending.

Asked if this wouldn't happen now, given the need to complete the budgeted expenditure before the end of March, the official said the Government departments have till the first fortnight of April to release the sanctioned payment. So the tightness could continue for a while.


Banks have been scrambling to raise money before the hike. While call rates are supposed to be inside the corridor between reverse repo at 5.75 per cent and repo rate at 6.75 per cent, they have shot up and are hovering close to 8 per cent levels.

The one-day call money rate ended at 6.75-6.85 per cent on Thursday versus 7.10-7.25 per cent on Wednesday.

Mr Ramnath Pradeep, Chairman and Managing Director of Corporation Bank, observed that the increase in the call money rate is quite natural.

On the high call money rates in the market, he said: “That is quite natural. The demand is high, and the call money rate is going to be high.''

Asked whether it would still go up, he said: “I don't think so. Only two days more are left for the payment of advance tax. Thereafter, it may cool down.”

Asked about the liquidity situation in his bank, he said: “We are comfortable liquidity-wise.''

According to Mr P. Jayarama Bhat, Managing Director of Karnataka Bank, the present level of the call money rate is because of the advance tax payments.

“When repo rates are hiked, naturally, the call rate increases. It is usually 1 per cent above the repo rate,'' he added.

(With inputs from A. J. Vinayak in Mangalore)

Published on March 17, 2011

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