Even as the short-term interest rates continued to remain high in a tight money market,the Reserve Bank of India (RBI) on Friday initiated moves to ease the situation,allowing banks to temporarily hold a slightly smaller quantum of government securities than the mandated 25%. The central bank is also giving banks special access to liquidity windows for the next few days to provide liquidity comfort arising out of frictional liquidity pressure. Banks need to hold only 24% of their net demand and time liabilities in the form of the statutory liquidity ratio (SLR) for two days on October 30 and October 31 as a temporary measure. They can use the cushion to access the RBIs special liquidity window. Collectively,1% of the net demand and time liabilities would amount to Rs 45,000 crore. Among the measures initiated to ease liquidity,a special second liquidity adjustment facility (LAF) has been slated by the apex bank for two days on Friday and Monday. Further,a special two-day repo auction,under the LAF,will be conducted on Saturday. That apart,reverse-repurchase auctions will also be held on all three days to mop up any surplus. Meanwhile,overnight borrowing rates surged to an intra-day of 12% on Friday,though they closed at 6.5%,slightly lower than Thursdays closing of 6.8%,with banks borrowing Rs 1,31,260 crore from the RBIs first LAF window and Rs 350 crore from the second special window. Over the past week,daily borrowings by banks have averaged Rs 80,000 crore. Approximately,Rs 70,000 crore is estimated to have moved out of money market mutual fund schemes over the past month with banks withdrawing the bulk. There is some amount of uncertainty on the liquidity position which will become clearer once the money invested in the Coal India IPO is refunded to investors next week. However,at a fundamental level the market estimates the deficit to be around Rs 50,000 crore, said RVS Sridhar,president,global markets,Axis Bank. Added Manish Wadhawan,director and head of interest rates,HSBC India,The system is structurally short by close to Rs 75,000-80,000 crore. However,the IPO money will flow back into the system by early next week. Last week,the government announced a buy-back of government securities worth Rs 12,000 crore. In the first tranche,RBI has bought Rs 2,148 crore worth of gilts. The scramble for money has left companies borrowing for three months,with commercial papers forking out 8.4% while banks looking to pick up funds through three-month certificates of deposits (CD) were paying 7.85%. Longer money was more expensive with CDs commanding 9%,up 40 basis points compared with a fortnight back. Volumes in the CD market crossed Rs 23,170 crore compared with the average volume in the last four days of Rs 80,000 crore. DK Joshi,principal economist at Crisil Ratings,believes that given the current inflationary pressures in the economy,the central bank is not in favour of excess liquidity. They basically want to maintain a tight leash on the liquidity front. Banks have started lending but then we will have to watch out for the credit growth numbers for the second half of the year, Joshi observed. Liquidity has been in short supply since mid-September following outflows for advance tax payments. Coal Indias Rs 15,000-crore IPO hit the market last week and was oversubscribed by almost 15 times. The quota reserved for institutions was subscribed more than 23 times,of which about two-thirds of the subscription came in from foreign institutional investors.
