Joel Rebello

Mumbai: The once slow-paced money market is these days witnessing liquidity fluctuations on a regular basis.

For example, take the daily liquidity adjustment facility (LAF) auctions.

Banks parked Rs 27,153 crore through the reverse repo on an average in the reporting fortnight from April 26 to May 9, with the highest of Rs 53,430 crore and lowest of Rs 4,270 crore.

However, in the new reporting fortnight - which started on Saturday, May 10 - the reverse repo number has dropped drastically to Rs 4,270 crore on Monday and Rs 2,430 crore on Tuesday.

Bankers blame the drop on a variety of factors, ranging from the cash reserve ratio hike by the RBI to a slowdown in government spending.

The RBI hiked CRR by 50 basis points to 8% on April 17. The hike -already in effect in two stages, starting April 26 and May 10 - sucked out Rs 18,500 crore from the banking system by May 10.

Sandeep Bhandari, managing director, global markets, South Asia, Standard Chartered Bank, said that besides the CRR hike, the fact that the RBI doesn’t have to intervene in the forex market to temper rupee appreciation has also played a part.

“The RBI was preventing the rupee from rising around the 40$ levels, but since then, the rupee has weakened so the RBI does not need to sell rupees (which adds to rupee liquidity) in the market,” Bhandari said.

The rupee has fallen sharply from its 40.61$ close on May 5 to Rs 42.11$ on Tuesday, due to dollar demand from importers and weaker inflows into India.

Treasurers point out that banks are cautious, as another 25 basis point CRR hike will become effective from May 24. That hike will suck out approximately Rs 9,000 crore more from the banking system.

P Mukherjee, treasurer at Axis Bank, said banks are already preparing for the higher CRR requirement.

“The already-effective CRR hikes have eaten away some available liquidity and may be, banks are more cautious,” Mukherjee said.

Hitendra Dave, co-head of global markets, HSBC, points out that a Rs 10,000 crore outflow on Monday due to a government bond auction on Friday has also impacted liquidity.

“Around Rs 20,000 crore would be sucked out by the combination of CRR hikes and bond auctions and the balance would be because government expenditure didn’t pick up,” Dave said.

Going forward, bankers say the RBI won’t allow liquidity to build up to the level seen during the end of April.

“In the short-term, we expect liquidity to be more balanced. Banks will be cautious and our feeling is that RBI won’t allow more than Rs 10,000-Rs 15,000 crore liquidity in the market,” Bhandari said.

P Mukherjee from Axis bank expects less MSS bond issuances in the coming fortnight.

Dave from HSBC said government expenditure could also be a contributor to liquidity in the short-term: “It is difficult to predict government expenditure, but bond maturities of around Rs 7,500 crore will help liquidity. We expect liquidity to be balanced to tight in the short-term.”

Source : DNA