RBI opens tap to absorb IMD shock

Pumps in record Rs 17,680 crore in a single-day into the domestic banking system.

The Reserve Bank of India yesterday infused a whopping Rs 17,680 crore into the domestic banking system, three days before the redemption of Indian millennium deposits (IMDs). The banking system has been starved of cash in the past few weeks.

This is the highest single-day infusion in this calendar year. This time, however, the funds have been pumped in through two reverse repo auctions. The RBI had infused Rs 17,235 crore in November 2004.

Tight liquidity has seen call rates soar to 7 per cent in the overnight money market. Analysts said the liquidity situation was expected to worsen this week when the system would witness an outflow of Rs 33,000 crore because of the redemption of State Bank of India's IMDs on December 29.

The RBI had said it would release money for the redemption from its foreign exchange reserves to SBI, but on the condition that the latter provided rupee funds of nearly Rs 33,000 crore in return.

Traders said SBI would have to either raise rupee funds from the domestic market or sell bonds to the central bank or other commercial banks to meet the obligation.

They were hopeful that interest payments of Rs 10,000 crore, expected by the end of December on a special deposit scheme run for investments by India's largest pension fund, the Employees' Provident Fund, would boost fund supply.

"Even the government, which is sitting on cash supplies to the tune of Rs 20,000 crore, should start spending to boost domestic liquidity," said a chief dealer at a private bank. Liquidity has dwindled by over 99 per cent since September.

The banking system's net liquidity is just Rs 135 crore "" sharply lower than Rs 36,000 crore in mid-September.