Banks' LAF borrowings at four-month high

Last Updated: Thu, Oct 18, 2012 19:22 hrs

Liquidity deficit in the banking system is at a four-month high, owing to the outflow of funds from banks due to the festive season. On Thursday, banks borrowed Rs 1,016,35 crore under the repo auction of the Reserve Bank of India (RBI)’s daily liquidity adjustment facility (LAF), compared with Rs 86,260 crore yesterday.

On June 22, borrowings under the LAF window stood at Rs 1,06,430 crore.

“Tomorrow being a reporting Friday, banks are covering for the liquidity deficit to ensure the cash reserve ratio (CRR) requirement is met. Because of the festive season, there is liquidity tightening in the system, there are withdrawals by customers from the banking system. Also, government spending is yet to flow into the system,” said N S Venkatesh, chief general manager & head of treasury, IDBI Bank.

In the last month, the daily average borrowing under the LAF window has been about Rs 50,000 crore.

CRR is the proportion of total deposits a bank has to keep with RBI as cash. In the mid-quarter review of monetary policy last month, RBI had cut CRR by 25 basis points to 4.5 per cent of net demand and time liabilities (NDTL). Banks calculate NDTL every alternate Friday (reporting Fridays).

“Since RBI has made a commitment it would always ensure liquidity does not cross +/- one per cent of NDTL, I think it would either have to cut CRR or resort to buying/selling gilts through open market operations,” said Hitendra Dave, managing director and head of global markets (India), HSBC.

Most bankers expect a further cut in CRR in the second quarter monetary policy review, scheduled for October 30. “A 50-basis point cut in CRR will reduce LAF borrowings and the daily average borrowing would then be Rs 37,000-40,000 crore,” said Mohan Shenoi, president (group treasury and global markets), Kotak Mahindra Bank.

Venkatesh said more liquidity in the system would also ensure monetary transmission became faster.

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