Call seen firm till December on skewed liquidity

Interbank overnight rates are likely to stay firm until December because the distribution of liquidity with banks is expected to be skewed with a handful of banks, dealers said.

"Till December, the call rate will remain high as liquidity will continue to remain skewed," said Sudhir Joshi, treasurer HDFC Bank.

Since September 19, the call rate has been hovering well above the 6 per cent reverse repo rate of the Reserve Bank of India. The rate had firmed up because advance corporate taxes paid on September 15 drained about Rs 216 billion from the banking system.

However, although liquidity improved subsequently, the rates haven't come down.

This is because banks which have surplus funds aren't lending much in the overnight market and, instead, are parking the funds at the RBI's reverse repo tenders.

Data analysed by CRISIL MarketWire showed that despite the rise in quantum of liquidity, the uneven distribution has driven up the rates.

Average daily drain at RBI reverse repo tenders drain""a well-tracked indicator of liquidity""has risen to a Rs 147 billion in the reporting fortnight to October 13 from Rs 70 billion in the previous fortnight.

It was an average of Rs 225 billion in the fortnight ended September 15. According to dealers, liquidity has improved owing to a rise in government expenditure.

However, the number of bids in reverse repo auctions have fallen by nearly half to an average of 15 bids in the last two reporting fortnights from 34 bids in the first fortnight of September.

Today, the RBI received just 2 bids for Rs 5.85 billion at its first of the two daily reverse repo tenders, against 7 bids for Rs 62 billion received for similar tender Friday.

This, treasurers say, indicates that liquidity is skewed and the funds that have come in the form of government expenditure have gone to only a handful of banks.

According to dealers, several state-owned banks weren't lending overnight funds and instead were parking their surpluses in the central bank's reverse repo tenders.

"Mostly state-owned banks have large funds and so though Rs 20,000 crore is there in the system, the call rate is not moving below 6.5 per cent," said Avnish Jain, director fixed income, Yes Bank.

"When state-owned banks are hitting their lending limits in call they are parking the funds in reverse repo. Therefore, the reverse repo amount seems to be comfortable," Jain said.

With liquidity expected to fall further due to retail outflows ahead of festivals in this week, the call rate is likely to touch even 7 per cent, dealers said.

Around Rs 100 billion of festival related outflows are expected in the current fortnight.

"Liquidity is going to be tight after Rs 9000 crore of (government bonds) auctions and cash outflows now," said a dealer.

Traditionally, liquidity is known to slide due to heavy cash withdrawals during the Diwali and Ramzan Id next week.

Moreover, the third quarter beginning October is typically a busy season for banks due to the robust credit offtake.

A more than 30 per cent credit growth will put more pressure on banks' coffers during the festive season.

The tight liquidity concern is expected to spill over to the gilts market as well.

The 10-year benchmark 2016 paper can shoot up to 7.75 per cent by end-October from 7.67 per cent, dealers said.

With inflation above 5 per cent, liquidity is likely to fall, and RBI's mid-term policy on the anvil, the mood in call and gilts market is likely to remain gloom.

However, "from the first week of December, the outflows during festival season will start coming back in the form of savings deposit," Joshi said.