IMD redemption leaves big dent in liquidity

Total outgo: Rs 33,000 cr; call money rate rises to 7%.

The redemption of India Millennium Deposits (IMDs) passed off "smoothly", but the Rs 33,000 crore outgo left in its wake a big dent in liquidity in the banking system and a rise in short term rates.

The Reserve Bank of India (RBI) had to resort to large injection of liquidity into the banking system for the fourth consecutive day today, despite unwinding of Rs 23,250 crore of market stabilisation scheme (MSS)balances and cancellation of seven MSS auctions of treasury bills aggregating Rs 19,500 crore since November 2005.

RBI injected Rs 30,110 crore of liquidity today through the 1-day repo (repurchase) window under both the daily liquidity adjustment facilities, after having to infuse Rs 26,685 crore yesterday, Rs 2,14,115 crore on Tuesday and Rs 17,680 crore on Monday.

The situation is completely in contrast to the one in mid-September when the banking system was flush with liquidity of around Rs 36,000 crore.

The overnight inter-bank call money rate had breached the repo rate of 6.25 per cent in November itself. The rate has further hardened to 7 per cent from 6.50 in November.

In normal circumstances repo rate acts as the ceiling for the call rate, as banks needing to bridge temporary mismatches in funds requirements have access to RBI's repo window.

The interest rate on certificates of deposits, which banks issue to raise resources, shot up by 100 basis points to 7.50 per cent since November 11, when the first MSS auction was cancelled.

The rates on commercial paper, through which companies mobilise up to 1-year funds, have risen by 115 basis points to 7.75 per cent over the same period.

Dealers said the redemption of IMDs did not have any major disruptive impact because State Bank of India (SBI), which raised $5.5 billion of IMDs in November 2005, used its internal resources to meet the resources needed and almost all of the $7.2 billion of foreign currency requirement was met from the foreign exchange reserves.

SBI bought $7.07 billion of foreign currency from the RBI for Rs 31,951.23 crore. The foreign exchange was bought at an average price of Rs 54.13 per dollar, much lower from Rs 46.65 at which it had sold the foreign exchange in November 2000. The exchange rate gain for SBI on the principal amount is close to Rs 800 crore.

The RBI said the contributions made by SBI and the government towards possible exchange losses, which are held in a maintenance of value account with the central bank, have not been utilised and will be refunded.

SBI was to bear exchange loss to the extent of 1 per cent of the principal amount and the balance by the government. SBI had not made any provisions in 2003-04 and 2004-05 as the rupee had depreciated, while the government made a provision of just Rs 1 crore in 2005-06 budget.