The Reserve Bank of India (RBI) on Tuesday reintroduced measures to ease liquidity, as borrowing by banks exceeded Rs 1 lakh crore for a second day, indicating tightness.
The central bank opened a second liquidity adjustment facility (LAF) window and additional liquidity support under LAF up to 1 per cent of net demand and time liabilities. Both measures will be available up to December 16.
RBI said the measures were announced “in order to provide liquidity comfort arising out of frictional liquidity pressure”.
RBI stated in a release on Tuesday that banks would not be penalised for any shortfall in statutory liquidity ratio between November 9 and December 16. Banks are required to invest 25 per cent of their net demand and time liabilities in government bonds and other approved securities under SLR. This is an “ad hoc, temporary measure”, the central bank said.
Inter-bank call money rates, which were at 7.40-7.50 per cent — higher than the repo rate of 6.25 per cent — cooled to close at 6.7 per cent after RBI’s measures. Net borrowing by banks, which was Rs 1.10 lakh crore from RBI’s first repo tender on Tuesday, came down to Rs 6,825 crore in the second LAF.
“Liquidity is tight at the moment,” said Deepak Parekh, chairman of HDFC. “It will start easing as money comes into the system. The tightness is only for some time,” he added.
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Still, bankers say the current conditions reflect a mismatch in liquidity more than a cash crunch. “If one looks at investment by banks in government bonds in excess of minimum SLR requirements, it will not show there is a liquidity squeeze in the system,’’ said a senior official at a large, state-run bank in Mumbai.
“The true indicator of liquidity is borrowing in the call money market. The rates there have not flared up the way they surged to double digits on October 29,’’ he added.
A possible reason for RBI introducing these measures is to avoid a recurrence of the sudden scarcity of funds in the last week of October, accentuated by the Coal India Ltd initial sale of shares. Coal India, which sought to raise a record Rs 15,500 crore, received more than 15 times the amount.
| BORROWINGS UNDER LAF | |
| 29-Oct | -1,17,660 |
| 30-Oct | -11,025 |
| 1-Nov | -70,150 |
| 2-Nov | -58,390 |
| 3-Nov | -43,220 |
| 4-Nov | -79,950 |
| 8-Nov | -1,16,340 |
| 9-Nov | -1,09,720 |
| Source: Bloomberg | Rs crore |
On October 29, as overnight rates shot up to 12 per cent and bank borrowing under LAF crossed Rs 1 lakh crore, RBI provided similar relief.
The October 29 measures were initially up to November 2, but were extended to November 7. Following these measures, the overnight rate moderated to near the upper-end of the interest rate corridor, but banks’ borrowings from repo tenders fell sharply.
According to RBI, though the liquidity squeeze is consistent with its anti-inflation stance, an excessive deficit could prove disruptive both to financial markets and credit growth in the banking system.
“To ensure that economic activity is not disrupted by liquidity constraints, the liquidity deficit needs to be contained within a reasonable limit,” RBI had said during its mid-term review of monetary policy on November 2.
The central government had also announced repurchase of select dated securities to infuse liquidity into banks. RBI conducted open market operations, through which it bought three bonds and pumped Rs 8,352 crore into banks.