Banks faced a liquidity shortage on Friday, borrowing heavily from the repo window of the Reserve Bank of India. They borrowed Rs 1.27 lakh crore, highest in this financial year. The liquidity deficit in all the three working days of the week was higher than the central bank’s comfort level of Rs 50,000 crore.
Bankers said government bond auctions, central bank’s intervention in the foreign exchange market to arrest the rupee fall was the key reason for the liquidity tightness. In this week, the central government has borrowed Rs 25,634 crore from the market and due to the higher borrowing the yields also shot up with the yield on the benchmark 10 year government bond crossed nine per cent intraday.
In New Delhi, RBI deputy governor Subir Gokarn said the central bank would consider injecting liquidity into the system only if the current large deficit persisted, even as the interest cycle may have peaked. “It is early; it has not yet become a persistent pattern. We will keep watching,” he said.
The government raised only Rs 9,000 crore at a bond auction on Friday against the targeted Rs 13,000 crore, devolving a large amount on primary dealers and even rejecting all bids for the shorter paper on offer. Earlier this week, a part of the cash management bills on offer remained unsold.
In addition, most banks are not rolling over short-term deposits due to lack of credit demand and the liquidity need is seen fulfilled from the repo borrowing. Issuances of certificates of deposit (CDs) have fallen in recent weeks, while deposit growth is healthy.
The rates of three-month and one-year CDs were 9.3-9.35 per cent and 9.65-9.7 per cent, respectively.
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So far in 2011-12 (April onwards), banks’ deposits have grown 7.9 per cent, compared with 8.6 per cent in the same period last year. Loan growth has fallen to 5.3 per cent from 7.2 per cent, showed RBI data.
On a year-on-year basis, loan growth was 19.2 per cent as on October 21, while deposit growth was 15.2 per cent.
RBI projects 18 per cent loan growth and 17 per cent deposit growth for the current financial year.
Loan growth has declined in the current financial year on the back of a 375 basis points rise in repo rate since March 2010.
RBI has raised policy rate 13 times since March 2010 in a bid to control inflation, which has topped nine per cent for nearly a year.