Bulk deposit rates, which are short-term corporate deposits, have started heading north following persistent liquidity deficit in the system, with banks borrowing over Rs 1 lakh crore from the central bank on Monday. According to bankers, the one-year bulk deposit rate has gone up beyond nine per cent, compared with 8.9 per cent a fortnight ago, and some banks have offered 9.15 per cent for such deposits.
The liquidity deficit continued with the government curtailing its spending for sticking to the targeted fiscal deficit of 5.3 per cent in the current financial year. Today, banks have borrowed Rs 1.09 lakh crore from the repo facility of the central bank. The liquidity deficit has continued - which is higher than the Reserve Bank of India (RBI)'s comfort level of plus or minus one per cent of banks' net demand and time liabilities - despite the central bank dropping the cash reserve ratio by 25 basis points (bps) to four per cent during the third quarter review of monetary policy in January. The 25-bps cash reserve ratio (CRR) cut has infused Rs 18,000 crore of primary liquidity into the system.
According to treasury officials of banks, the liquidity deficit has caused short-term rates to move up by 10-25 bps over the last few days. Liquidity has also become tight as bulk deposits and certificates of deposit (CDs) are coming up for renewal. Bankers estimate about Rs 1 lakh crore of CDs will be matured only in March.
Short-term rates will be under pressure as the financial year nears to a close and banks will be rushing for funds to meet their yearly target.
"There will be upward pressure on bulk deposit rates and CD rates, as banks will try to boost their balance sheet to meet their balance sheet growth target," said the senior treasury official of a public sector bank.
Deposit growth, in particular, has been sluggish, and registered a growth of 13.1 per cent year-on-year till January 25, while credit growth was 16 per cent, in line with RBI's projection for 2012-13. RBI has projected 15 per cent deposit growth for the current financial year.
Market participants are also expecting the central bank to infuse liquidity by buying bonds to ease the pressure, as two more bond auctions are scheduled this financial year. "The market is expecting OMO (open market operation) announcement this week so that the liquidity is kept comfortable," said S Srinivasaraghavan, executive vice-president and head (treasury) of Dhanlaxmi Bank. RBI has not conducted OMO since January 29 when CRR reduction decision was announced.
A section of the market who are not expecting OMOs sees cancellation of the last auction of the 2012-13 scheduled on February 22. "There are only two more auctions remaining due to which there may not be any OMO now. It may be done by RBI in the next financial year to front-load the government borrowing comfortably.
However, the last auction may be cancelled due to which it will act positively for the bond market," said Mohan Shenoi, president - group treasury and global markets, Kotak Mahindra Bank."The yield on the 10-year government bond may move in the range of another two bps up or down from the current levels till the budget announcement," he added. The yield on 10 year benchmark government bonds closed at 7.86 per cent on Monday, up two bps from its previous close.