Mar 15, 2012, 05.38 PM IST

RBI credit policy: Is the tight liquidity in the system expected to ease now?

After a series of liquidity tightening measures, the Reserve Bank of India (RBI) has finally forecasted an easing liquidity situation in its mid quarter monetary policy announced earlier in the day. With the deamnd for money coming down by March-end, bankers too have endorsed the view.

Source: Moneycontrol.com

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Moneycontrol Bureau

After a series of liquidity softening measures, the Reserve Bank of India (RBI) has finally forecasted an easing liquidity situation in its mid quarter monetary policy announced earlier in the day. With the deamnd for money coming down by March-end, bankers too have endorsed the view.

�By the first week of April, the liquidity deficit will fall to Rs 50,000-60,000 crore level,� Moses Harding, head � asset and liability committee as well as economic market research, IndusInd Bank told Moneycontrol.com.

�The tightness is temporary in nature due to the year end demand. After March 31, the demand will fall sharply. Afterwards, any cash reserve ratio (CRR) cut is unlikely in the next couple of months. I expect CRR to be at 3.5% to the close of FY13. With the starting of busy season (September-March), banks� borrowing will again rise,� he said.

Banks� net borrowing through liquidity adjustment facility (LAF) touched all time high at around Rs 1.92 lakh crore on March 01, 2012. In between Feb 29 and March 14, the average daily bank borrowings stood around Rs 1,36 lakh crore. On account of advance tax payments, corporates were borrowing money from banks.

To stem the rising liquidity deficit, the RBI slashed the CRR by 75 bps on March 9 to 4.75%. This pumped in Rs 48,000 crore into the system. In 2012 so far, the regulator has collectively injected around Rs 80,000 crore liquidity by 125 bps CRR cuts. CRR is the portion of net demand and time liabilities (NDTL) (read, total deposits) that banks have to mandatorily keep with the regulator.

According to A D M Chavali, executive director and treasury head at Indian Overseas Bank (IOB) the liquidity tightness is not going to be a perpetual issue.

�Most of the banks have excess SLR bonds. Hence, they are trying to exhaust those by borrowing money from the RBI�s repo window. Lenders are borrowing cheap money at just 8.50% instead of paying higher rates in the CD (certificate of deposits) market. Moreover, CDs worth Rs 1.5 lakh crore are going to expire in the system. For that, banks need to mop up funds to repay those,� he told Moneycontrol.com.

In the CD market, the interest rate has touched 3 years high at 11.75% while inter-bank call money rate is hovering around 9%.

Statutory Liquidity Ratio is the portion of deposits banks keep in government securities. Currently, the minimum requirement is at 24%.

�The liquidity is expected to moderate by the end of March. It would fall below Rs one lakh crore level. Credit growth projection is likely to be achieved by the end of fiscal year. However, new investments will not happen unless interest rates fall,� said Shyam Srinivasan, MD & CEO, Federal Bank .

Even though net LAF borrowing is likely to come down, some feel, the liquidity deficit will not touch the RBI�s comfort zone i.e. 1% of net time and demand liabilities (NDTL) or Rs 60,000 crore.

�RBI indicated its comfort zone for deficit liquidity when the banking system was holding 3.5% excess SLR bonds. Now, the same is at 5.50%. Hence, the level of Rs 60,000 crore does not hold much relevance,� said IOB�s Chavali adding that daily LAF will definitely drop below Rs one lakh crore level.

Banks� net borrowing from RBI�s LAF window:

Date

Amount

Rs in crore

March 14

1.24,855

March 13

1,23,090

March 12

1,29,895

March 9

*CRR cut by 75bps