Liquidity may return to deficit zone soon

Though the easing of short-term rates and the parking of surplus funds by banks through the reverse repo (the rate at which RBI borrows money from banks) window show an improvement in liquidity, the trend may not last for long. Economists expect liquidity to return to the deficit mode by the next fortnight.

“We expect LAF to once more, dip into the negative zone in the fortnight starting April 9, as the under-maintenance of cash reserve ratio (the amount of money that banks have to park with RBI) is reversed,” said economists at Kotak Economic Research. However, the liquidity deficit is expected to remain close to RBI’s comfort zone of 1 per cent of net demand and time liabilities.

Banks on Thursday parked Rs 74,320 crore through the RBI’s reverse repo window. Liquidity has swung sharply into the positive territory, with LAF on April 5 at Rs 32,500 crore after being at a deficit of over Rs 1 lakh crore on March 31.

Standard Chartered Bank, in a research report, said though the liquidity deficit is expected to return to the RBI’s comfort zone in April, it was unlikely to turn to a surplus.

“We find that notwithstanding the recent easing, system liquidity may remain tight due to government borrowing, a high credit-deposit ratio, and a weaker balance of payments,” said a Goldman Sachs report.

Owing to the tight liquidity situation in March, rates on certificates of deposits (CDs) had hardened further, with three-month CD rates at 10.20 per cent and one-year CD rates at about 10.15 per cent. “However, by the end of the month, due to better liquidity expected in April, the three-month CD rates softened to around 8.70-80 per cent and the one-year CD rates declined to 9.50-60 per cent,” said K Ramanathan, CIO, ING Investment Management.

The overnight interbank call money rate ended at 5.85 per cent on Thursday, after touching a high of 9.5 per cent on April 1.

Going forward, economists expect RBI will continue to prefer liquidity deficit due to concerns of rising inflation. “With our expectation of a further rise of 50 basis points in policy rates, we think short-end rates may remain high in 2011-12,” said the Goldman Sachs report.

Source: Business Standard