Banks brace up for cash crunch

The excess cash balance in the banking system is expected to slip back into deficit as the second 25-basis-point increase in the cash reserve ratio (CRR) takes effect tomorrow, taking it to 5.5 per cent.

The overnight call rate is seen in a range of 8-10 per cent till mid-February, as banks would take some time to soften credit growth.

The overnight rate is the rate at which banks borrow money in the inter-bank call money market to meet statutory reserve requirements.

After the first 25-basis-point increase in the CRR on December 23, the call rates had zoomed to a six-year high of about 20 per cent, but they subsequently settled as spending by the government led to inflow of liquid cash into the banking system.

The Reserve Bank of India (RBI), in a surprise move on December 8, had used, in the CRR, its third monetary policy tool to slow down unbridled credit growth and also contain inflationary pressures.

The RBI decided to increase the CRR in two stages of 25 basis points each, taking effect on December 23, 2006, and January 6, 2007, to suck out Rs 13,500 crore of liquidity from the banking system.

The increase in the CRR came as a shock to banks that were struggling to fund the 30 per cent credit growth, with accretion of deposits lagging at around 21 per cent. The CRR made liquidity on the margins very tight, even as banks were stretched for lendable resources.

"Liquidity will be tight again. We should see the call rate at elevated levels, though perhaps not at the highs touched last week," said Nitin Jain, head of fixed income at ICICI Securities.

The government has reduced the size of its scheduled borrowing next week from Rs 9,000 crore to Rs 4,000 crore, which will slightly ease the tight liquidity pressure. The government will sell 30-year bonds carrying a coupon of 8.33 per cent on January 12.

The rate curve

The overnight call rate is seen in a range of 8-10 per cent till mid-February

After the first 25-basis-point increase on December 23, the call rates had zoomed to a six-year high of about 20 per cent

They, however, subsequently settled as spending by the government led to inflow of liquid cash into the banking system