Cash conditions in banking system may improve by March-end
Cash conditions in the Indian banking system may improve substantially by the end of March as the government is unlikely to hold back on budgeted spending as the fiscal year nears its end, policymakers said.
February 08, 2011 / 13:14 IST
Cash conditions in the Indian banking system may improve substantially by the end of March as the government is unlikely to hold back on budgeted spending as the fiscal year nears its end, policymakers said.
Market worries that tight liquidity may persist for longer than expected were fanned late last month when a central bank deputy governor said the government may opt to carry over cash balances into the fiscal year that starts in April, which drain the banking system in the near term.Government and central bank officials, however, told Reuters that New Delhi did not plan to hoard its funds much beyond the start of April."This year's spending should continue till April beginning, as is usually the case. The government will exhaust its budgeted spending and it will fund its spending through tax collections and drawing down cash balances," a central bank official said."Banks are already borrowing much less through the LAF (liquidity adjustment facility)," added the official, who declined to be named because he was not authorised to speak to the media.From November through January, banks borrowed an average around Rs 850 billion (USD 18.7 billion) a day from the Reserve Bank of India's repo window and there were days in November when borrowing exceeded Rs 1 trillion. That average has fallen to about Rs 720 billion this month."The LAF numbers are already coming down. This is an indication that government spending is picking up," said another official at the RBI.The RBI has said it wants to keep the liquidity in the banking system in a range between a Rs 500 billion shortfall and a Rs 500 billion surplus. In present conditions, that means the central bank would seek to bring banks' borrowing down to Rs 500 billion, but would not use secondary bond market purchases to bring banks into surplus."Given that inflation continues to be a major problem, we cannot let liquidity move into the positive zone. But we do not foresee a need for any open market operation as of now for liquidity management," said one of the RBI officials.On Monday, RBI Deputy Governor Subir Gokarn also said that the government is drawing down its cash balances, which could eventually help in easing the cash tightness.Overnight Indexed Swaps (OIS) -- the most sensitive market to the liquidity and interest rate outlook -- have risen since the central bank's quarterly policy review on January 25, with the shorter end rising faster than the long end amid worries over persistent tight cash conditions.The OIS curve, which has flattened in anticipation of a short-term cash crunch, may steepen if government spending helps bring the liquidity deficit below Rs 500 billion.The two-month OIS has risen by 25 basis points to 7.20% since January 25 and the most liquid one-year OIS rate rose by 12 basis points to 7.49%.While the long-end may remain elevated on worries over sticky inflation, relief should be visible on the shorter-end if liquidity crunch eases.Government seen opening taps again
The government was scheduled to spend Rs 4 trillion in the current quarter, of which around Rs 3 trillion remains, analysts say."Government will spend money as the tax revenues, including Q4 advance tax, which is usually the highest, come in. That again would be close to a trillion rupees," said a senior finance ministry source.A government runs a surplus cash balance when it does not spend funds as quickly as it brings them in. Typically, build-ups of large balances are temporary, and the funds are parked with the central bank against government securities.However, after the unexpected success of telecom spectrum auctions in June, which generated some USD 23 billion and sucked piles of cash out of the banking system, the government's cash balance ballooned to more than Rs 1 trillion, a record.Currently, the government's cash balance with the RBI is around Rs 700 billion, one source said.New Delhi was unable to accelerate its spending, resulting in a prolonged bout of cash tightness that was aggravated by a drop in currency in circulation during the festive season in October. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
