Companies withdrawing funds from banks to meet advance tax obligations last week led to a decline in the liquidity scenario. This was because banks were left with no option but to borrow from the Reserve Bank of India (RBI) to meet the requirement of reserves on the start of the new reporting fortnight.
Banks on Monday borrowed Rs 109,840 crore from the repo window under RBI's liquidity adjustment facility (LAF). This is the highest since April 1, and much above the central bank's comfort level of Rs 50,000 crore. The repo rate currently stands at 7.5 per cent.
According to the Central Board of Direct Taxes, the government had received Rs 31,262 crore till June 15. Banks had borrowed Rs 60,000-70,000 crore in the initial days of the reporting fortnight, before the advance tax obligations were due.
"Liquidity is expected to improve in July, as money paid for advance tax comes back into the system in the form of government spending," said a bond dealer with Bank of India. Redemptions on government securities maturing this fortnight would also help boost liquidity. Cash management bills worth Rs 8,000 crore are set to mature this week.
Last week the government skipped bond auctions. "This helped ease the pressure on liquidity for now," said the dealer. According to the borrowing calendar, the government was scheduled to borrow Rs 12,000 crore through the sale of three dated securities last week. RBI on Monday announced the auction of Rs 12,000 crore on June 24.
Reflecting the demand for funds from banks, the weighted average rate of interbank call money moved up from 7.6 per cent on Friday to 7.7 per cent on Monday. The call money market recorded a volume of Rs 18,910 crore on Monday, which was the highest in June so far. According to the new operating procedure, the weighted average call money rate is the target rate for RBI's policy. The weighted average rate on collateralised borrowing and lending obligations rose to 7.43 per cent on Monday from 6.33 per cent on Friday.
