Liquidity, already tight, might get tighter due to the rise in the gap between credit and deposit growth, the Reserve Bank of India (RBI) has said.
“With an increase in the wedge between credit and deposit growth, banks are likely to tap the inter-bank market. With already tight liquidity conditions, the widening wedge poses a concern, as it is likely to worsen (this) condition,” it said today in its third-quarter review of Macroeconomic and monetary developments’.
RBI said total flow of financial resources to the commercial sector for the financial year till January 11 was higher than in the corresponding period of last year. The rise was accounted for by both bank and non-bank sources, though the latter played a dominant role.
Liquidity in the system has tightened at the start of the reporting fortnight. Today, a day before RBI’s third-quarter review of monetary policy, banks borrowed Rs110,165 crore, compared with an average daily borrowing of Rs98,000 crore this month under its Liquidity Adjustment Facility (LAF). On Thursday, with a bank holiday the next day, borrowing was Rs117,245 crore. Today’s high borrowing resulted in call money rates climbing to 8.09 per cent, compared with Thursday’s close of 8.05 per cent.
“It is the beginning of the fortnight. Banks are ensuring product requirements are met,” said N S Venkatesh, chief general manager and head of treasury, IDBI Bank. Banks borrow to meet their Cash Reserve Ratio (CRR) requirement. RBI had cut CRR by 25 basis points to 4.25 per cent of banks’ net demand and time liabilities effective the fortnight beginning November 3.
The Street does not expect a cut in the CRR tomorrow, at RBI’s mid-quarter review. Says J Moses Harding, head of the asset-liability panel and of economic and market research at IndusInd Bank, the LAF draw-down at over Rs1 lakh crore at the start of the reporting fortnight cycle is not a cause for concern. He expects the system deficit to stay steady at a fortnightly average of Rs75,000-80,000 crore.
“The system liquidity is seen comfortable, with banks holding Rs4-5 lakh crore of excess Statutory Liquidity Ratio (SLR), being funded out of Collateralised Borrowing and Lending Obligation or deposits. RBI would be seen absorbing the huge excess build-up of the SLR portfolio through open market operations, rather than injecting liquidity through a CRR cut,” he said.