Banks are gearing up to face further liquidity tightening, owing to advance tax outflows in mid-June. Bankers say retail and bulk deposits, would help them tide over the crunch, since the the credit pick-up is sluggish in the first quarter.
Banks borrowed Rs 73,390 crore on Wednesday from the Reserve Bank of India's (RBI) repo window to meet the reserve requirements in the first week of the reporting fortnight. The weighted average interbank call rate closed at 7.38 per cent, 13 basis points above the existing repo rate.
Analysts expect the liquidity deficit in mid-June to touch Rs 1-lakh crore levels, while the call rate could be higher than the repo rate by 50 basis points. “The advance tax outflows are expected at Rs 30,000-35,000 crore, which would lead to a liquidity deficit of around Rs 1 lakh crore,” said Sajjid Chinoy, India economist, JP Morgan.
Liquidity deficit had crossed Rs 1 lakh crore in the last quarter of 2010-11. However, this time, the rules of the game have changed. In case the statutory liquidity ratio (SLR) of a bank falls below 24 per cent, it would have to pay a rate of 100 basis points more than the current repo rate to RBI for overnight funds under the marginal standing facility. Till May 7, these funds were available at the repo rate.
To avoid the penal interest, banks are picking up funds through bulk deposits and certificates of deposits (CDs). According to market sources, banks have issued CDs of more than Rs 2,500 crore since Monday and most of these would mature in three months. Banks that issued CDs on Wednesday include State Bank of India, Indian Bank, Vijaya Bank, ING Vysya and Andhra Bank. The rates on CDs maturing in one year stand at around 10 per cent, while the rate for those maturing in three months are around 9.50 per cent.
Most public sector banks said their SLR was over 3 per cent, which works out to Rs 1.5 lakh crore, while the additional one per cent that can be availed under marginal standing facility would amount to about Rs 45,000 crore.
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“Since there is no credit growth, CDs would take care of the advance tax outflows in June,” said the treasury head of a public sector bank. Some foreign and private sector banks that tend to maintain the minimum required SLR could avail of the marginal standing facility, the official said.
Banks also hope increased interest rates on short-term deposits would attract more funds. Kotak Mahindra Bank on Wednesday increased short-term deposit rates by 25-50 basis points. Other banks, including State Bank of India, had increased short term deposit rates earlier this month.
“The currency in circulation is expected to rise sharply in those months and given the planned fiscal consolidation this year, the pace of government spending is expected to slow sharply later this year. Unless RBI engages in significant open market operations, the liquidity deficit could breach Rs 1 lakh crore for an extended period of time from September,” said JP Morgan's Chinoy.