Tax outflow, auction not to hit liquidity

Liquidity with banks will remain ample despite big drains in the next 10 days, dealers said Tuesday, banking on a rise in government spending to match outflow and keep liquidity intact.

At worst, the Rs 20,000-25,000 crore expected to flow out of the banking system by June 15 might reduce banks' subscriptions to Reserve Bank of India's daily reverse repo tenders.

But they won't pressure short-term rates up, bankers said.

The first of the two outflows will take place Wednesday. This is the Rs 10,000 crore due for two gilts auctioned today.

Next, by June 15, Rs 10,000-15,000 crore will be paid by companies as the first segment of advance tax payment for this financial year.

Later this month, government is also due to borrow Rs 5,000 crore via a gilt issue.

The tightening impact of these drains would be neutralised by a rise in government expenditure.

"There is no pattern to government spending, but going by current trends it can be expected that government expenditure will come back into the (banking) system, which will make available sufficient liquidity till July," said Samiran Chakraborty, chief economist of ICICI Bank.

There is evidence of rising government spending. Last month, for the first time in about 21 months, government had to seek an overdraft from RBI.