Banks' woes over tight liquidity conditions will mount in the middle of March during advance tax outflows,which could push up the call rate and also borrowing from the central bank's daily repo window. Dealers expect banks to borrow more than 1.25 trillion rupees a day from the central bank compared with an average daily borrowing of 740 billion rupees daily so far this month. Borrowing from the Reserve Bank of India (RBI) could touch a peak of 1.5 trillion rupees during mid-March and the inter-bank cash rate will be around 7.5 percent,said Manish Wadhawan,director and head of rates trading at HSBC India. The call money rate,which is the overnight borrowing and lending rate of banks,may not breach 7.5 percent,which should be a comfort to the central bank given that banks can meet their funds requirement from the RBI's repo window. Cash tightness in the banking system has been acute since November following inadequate government spending after the windfall collection from telecom spectrum,and public withdrawal of money from banks. From November through January,banks borrowed an average around 850 billion rupees a day from the RBI's repo window,touching over 1 trillion rupees even in February. Dealers estimate the advance tax outflows to be around 500-600 billion rupees,which could take the average liquidity deficit to around 1.5 trillion rupees. Liquidity-driven short-term rates have been edging up with the three-month CD rates at 10.10 percent while the one-year was at 10.20 percent on Thursday. Short-end rates on certificates of deposits are expected to inch up faster compared with the long-end in March,leading to an inversion in the CD curve,a phenomenon not seen since October 2008,when the global recession was at its height. Expectations of at least a 25-basis-point rate hike at the March 17 central bank policy review,to contain inflation pressure,is also adding to upward pressure on short-term rates,bankers added. Besides the existing cash crunch,a pick-up in credit growth for banks will also keep the demand for funds high. Banks' loan growth has been a robust 23.9 percent on year to Feb 11 compared to the RBI's projection of 20 percent for 2010 Repo borrowings should go up also because we expect that the credit growth will pick up. There has been good incremental credit growth. So going forward if it becomes stronger as expected,the repo borrowing will also go up,an official from a state-run bank said. However,dealers expect the cash crunch to ease by March-end and liquidity deficit to come down to around 400 billion rupees on government spending. The RBI has said it aims to maintain liquidity in the range of positive 500 billion rupees to negative 500 billion rupees and therefore should be comfortable with cash conditions March-end. Post the advance tax,for a short while the call rates may go up to 7 percent but that will be only a temporary aberration for about a week's time,said R.V.S. Sridhar,president and head of markets of treasury at Axis Bank. MARKET STRATEGY While many banks may be genuinely borrowing from RBI to meet liquidity mismatches,some may try to make hay while the sun shines. These banks usually during such cash crunch conditions,use their excess government bond holdings,otherwise known as statutory liquidity ratio or SLR,to borrow funds from RBI at the repo rate which is 6.5 percent now,and lend in the uncollateralised call market at 7.25-7.50 percent,thereby making a plum arbitrage gain. This is nothing new and always happens with mostly public sector banks who run high SLR during advance tax payments,said a foreign bank dealer. Some dealers also expect cash rate to remain near 7.50 percent on March 31 despite improved liquidity,as typically banks prefer to stay away from lending on the last day of a quarter as they would otherwise need to set aside capital for such lending,which would reduce their capital adequacy ratio.
