The unexpected pause in the monetary easing cycle has postponed hopes of further rate cuts, jacking up interest rates on short-term debt.
The liquidity situation, which has worsened due to advance tax flows, might stay above the central bank's comfort zone, even as it continues to purchase bonds through open market operations (OMOs), say traders.
"Availability of funds is not an issue, the cost is," said Ajay Manglunia, senior vice-president, Edelweiss Securities. He added the next rate cut might not come easily, inflation control being on top of the central bank's priorities.
The markets had expected a rate cut in the Reserve Bank of India's mid-quarter monetary policy review. It now seems further monetary easing might not come in July, either. RBI, which maintained status quo in the review, this Monday, is set to announce the first quarter review on July 31. Governor D Subbarao said at an industry meet yesterday that inflation was still above acceptable levels for the central bank.
Banks' borrowings from the repo window of RBI, an indicator of the liquidity deficit in the system, came down to around Rs 90,000 crore after the central bank reduced interest rates in its April policy. However, following Monday's pause from RBI and due to corporate advance tax outflows, liquidity tightness has returned.
The liquidity deficit rose to above Rs 1 lakh crore this week on account of advance tax outflows. The deadline for paying advance tax for the first quarter was June 15. On Wednesday, banks borrowed Rs 1.25 lakh crore from the RBI's repo window. The overnight call money rate touched a high of 8.3 per cent on Wednesday, as banks scrambled to arrange for reserve requirements.
"This despite continuous OMOs by RBI and low credit offtake," said a senior treasury official from a pubic sector bank. RBI has injected close to Rs 70,000 crore via purchase of government bonds under OMO auctions. The central bank will conduct another round of OMO on Friday, to buy Rs 12,000-crore worth of government bonds. And, auction government securities worth Rs 15,000 crore.
Rates on short-term debt instruments such as certificates of deposit (CDs) and commercial paper had spiked by 25 basis points after the policy announcement. These rates are expected to stay at current levels as the end of the first quarter draws closer. On Wednesday, banks issued CDs for three months at 9.4 per cent and for a year at 9.7 per cent.
Reflecting the expectations of liquidity tightness and higher rates, the rates on overnight indexed swaps also rose by 10-20 bps since the policy announcement.
