Medium-term liquidity fears justified: bankers

The country's foreign exchange reserves, after a long span of time, has dipped by $56 million to $1,18,572 billion for the week ended May 21 against $1,18,628 billion on May 14.

According to bankers, while earlier the reserves went down on account of dollar depreciation, this time it is a fall in absolute terms.

While the decline has confirmed the fear of market players that political uncertainty has cast a shadow on inflows, bankers said the concern of liquidity being under strain in the medium term, is quite justified as per the data released by the weekly statistical supplement of the Reserve Bank of India.

In fact, banks are of the view that if the slowdown in FII inflows continues, surplus liquidity will be slowly on its way out. An example of this is what happened last Friday.

A miscalculation by banks have resulted in call rates shooting up to a high of 6.5 per cent as excess funds were put in repo facility.

On the other hand, fund outgo was slated towards state government loans. Earlier such situations have arised, but funds were never in shortage, added a dealer.

Repo is the facility of the RBI for sucking out temporary liquidity, while call money is the inter-bank market for banks to borrow and lend money for intra-day operations.

There are some other indicators also. Despite huge funds being parked under repos, bank credit as well as investments used to be up.

Banking analysts said, earlier if credit went down, investments would show a uptrend and vice versa. This time both bank credit as well as investments are subdued.

While bank credit as on May 14 has gone down by Rs 683 crore, including a sharp decline in food credit of Rs 766 crore, investments in government securities fell by Rs 1628 crore.

Lack of deposit accretion has also resulted in a shortage of funds.