Call rate hits a low of 2.25 per cent, banks flush with funds.
The Indian credit market is flush with funds, at least for the time being. Call rates have eased to below 4 per cent levels from a high of over 20 per cent immediately after the Lehman Brothers’ collapse in September 2008.
On Thursday, the call rate hit a low of 2.25 per cent, according to data from the Clearing Corporation of India and the banks have parked nearly Rs 22,800 crore excess funds with the Reserve Bank of India (RBI) through the reverse repo route, as against borrowings of up to Rs 90,000 crore three months ago.
With the demand for loans slowing down — partly due to the reluctance of banks to lend and companies deferring their capital expenditure plans — the special liquidity windows opened by RBI have witnessed low demand.
Under the special refinance window, banks have accessed Rs 640 crore for lending to mutual funds, non-banking finance companies (NBFCs) and housing finance companies, according to data for January 14. The window came into existence in October after mutual funds and NBFCs saw pressure on fund raising.
Similarly, the outstanding under 90-day special refinance facility was estimated at Rs 5,224 crore on Wednesday. Even the forex swap facility was used by banks to raise Rs 1,040 crore as on Wednesday, according to data on the website of RBI.
Also the spreads on short-term loans, which had gone up to 400 basis points over benchmarks such as Mibor, or the Mumbai inter-bank offered rate, have eased to 200-250 basis points now.
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“The government spending in recent weeks has brought resources into the system. Plus, the impact of multiple cuts in the cash reserve ratio (CRR) and buyback of bonds issued under the market stabilisation scheme (MSS) has also released resources into the system,” said ICICI Securities Primary Dealership Managing Director and Chief Executive Officer B Prasanna.
In September, the market was affected as there were fears of defaults in India too, said Indian Banks’ Association Chief Executive Officer K Ramakrishana.
“Exports have declined and many sectors that are dependent on the global markets are passing through trying times. But the government and RBI have acted swiftly in coordination to infuse liquidity and restore confidence. Now, resources are moving into the system and liquidity is adequate. Business is picking up and banks are not unduly worried about a sharp rise in bad debt,” he added.
Since October, when the global credit crisis intensified, the central bank has reduced CRR by 400 basis points to infuse liquidity into the system. In addition, the repo rate — or the rate at which RBI lends to banks — has been lowered by 350 basis points. To make it unattractive for banks to park surplus cash with RBI, the reverse repo rate has also been pared by 200 basis points
Bankers said that liquidity is expected to remain adequate to meet growing credit demand and the government’s additional borrowing programme in March on the back of the easy monetary policy, lower advance tax payments and lack of fund-raising from the equity markets.
“Even if there is an outflow of resources, there are many refinance windows, whose use so far has been low. Banks can tap them when they need funds. It is a comforting factor for the system,” said Bank of India Executive Director B A Prabhakar.