Liquidity conditions are expected to tighten, due to government borrowing and increased demand for funds from banks as the new reporting fortnight begins this week.
Banks borrowed around Rs 21,000 crore on a daily average from the Reserve Bank of India (RBI) under the liquidity adjustment facility last fortnight. Market participants expect bank borrowings from the repo window to increase to Rs 50,000-60,000 crore daily in the coming week. “Banks may step up repo borrowings from RBI to cover the fortnightly reserve needs ahead of the expected rate hike in the following week,” said a bond dealer of a public sector bank.
Economists expect RBI to raise the repo rate (at which it lends to banks) by 25 basis points in the first quarter review of monetary and credit policy on July 26. “From a policy perspective, despite signs of slowing growth, we expect RBI to continue to focus on inflation to bring down still-high inflation expectations,” said economists Sonal Varma and Aman Mohunta of Nomura Securities.
Presently, the repo rate is 7.5 per cent. The Wholesale Price Index rose to 9.4 per cent in June as compared to the same period last year. The WPI was at 9.06 per cent in May and 8.66 per cent in April.
Adding stress to liquidity will be high government borrowing. RBI is scheduled to auction Rs 12,000 crore of dated government securities this week. In addition, the government has already announced auction of 56-day cash management bills of Rs 8,000 crore for tomorrow. State Development Loans worth Rs 5,250 crore, maturing in 10 years, will be auctioned on Tuesday. Also, 91-day Treasury bills worth Rs 7,000 crore and 182-day Treasury bills worth Rs 3,000 crore will be auctioned on Wednesday.
Reflecting the need for funds, the interbank call money rate is also expected to inch up. On Friday, the weighted average call money rate closed at 7.53 per cent and the Collateralised Lending and Borrowing Obligation closed at 7.44 per cent, according to Clearing Corporation of India.
