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Tuesday, April 1, 2014

No rate spike during fiscal end as RBI steps keep liquidity easy

Short-term rates bucked the trend of remaining elevated towards the end of fiscal year, as the measures taken by the central bank helped avoid the liquidity crisis typically seen in March. The banking system usually runs short of money close to the end of the fiscal year as companies withdraw funds to pay advance tax and the government reduces spending.

This year, the Reserve Bank of India took proactive steps to ensure liquidity, said NS Venkatesh, head of treasury at IDBI Bank. "Call rates went up to 13% for a brief spell on Friday but it did not sustain unlike last year-end," he said, citing the RBI's steps to provide cash in the system through term repos, bond buybacks and the marginal standing facility (MSF).

On Friday, March 28 - virtually the last trading day of the financial year - the weighted average rate in the inter-bank call money market, where banks and primary dealers lend and borrow, stood at 7.62%, compared with 8.50% a year earlier, according to the Clearing Corporation of India website. In the collateralised borrowing and lending obligation (CBLO) market, where banks, mutual funds and primary dealers with excess government securities participate, the weighted average rate was 11.72%, against 12% last year.

Banks also extensively utilised the MSF window that allows them to borrow from the RBI at 9% when they need more funds than what is available at 8% through the regular overnight repurchase, or repo, facility. This facility has seen Rs 5,000-6,000 crore of average daily borrowing in the past few weeks. The RBI held its last year-end MSF operation on Saturday between 7 pm and 7.30 pm.

"Banks were not in a hurry to borrow as MSF was readily available," said Devendra Dash, a senior bond dealer at DCB Bank. Only primary dealers and banks with fewer securities under the statutory liquidity ratio (SLR) borrowed from the call or CBLO markets at highest rates, he said. Under SLR rules, banks need to compulsorily invest 23% of their total deposits in government securities.

Currently, the overall SLR of India's banking system is 29.09% on an average, or 6.09% in excess. They can pledge these additional holdings to borrow from the MSF window. In fact, lenders can pledge an additional 2%, going beyond the mandated SLR requirement of 23%. Under the regular repo facility, the central bank had capped banks' borrowing limit at 0.50% of their total deposits or net time and demand liabilities.

This works to around Rs 36,000 crore daily. The central bank eased liquidity conditions by conducting various term repos for 5, 14, 21 and 28 days in the past one-two months. This process has infused about Rs 1.1 lakh crore.

It also pumped in Rs 20,000 crore into the system in March alone through government bond buybacks. "The RBI has managed liquidity quite well this year," said Yadnesh Chavan, fund manager, fixed income, at Mirae Asset Global Investments. "Last year, it was not the case. Short-term rates had shot up persistently."

Source: Economic Times


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