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Advance tax, gilt auction to drain liquidity
December, 08th 2006

Surplus liquidity in the banking system is likely to witness a sharp dip next week. Apart from Rs 9,000 crore auction outflows on Friday, an additional Rs 25,000-30,000 crore is likely to leave the system by mid-December by way of advance tax paid by corporates. This signals a total outflow of around Rs 40,000 crore in the next one week.

However, market participants are betting on an increase in spending by the government and inflows from foreign institutional investors (FIIs) to tide over this imminent crisis. On the other hand, it is also anticipated that RBIs intervention in the forex market will be driven more by the need to maintain liquidity rather than the rupee-dollar exchange rates.

Given that the rupee is not showing any signs of strengthening against the dollar, RBI may not have enough cause to intervene in the forex market, a route it also uses to maintain liquidity within the system apart from managing the exchange rates and competitiveness of exports.

Surplus liquidity within the system had eased since mid-October to less than Rs 5,000 crore and showed signs of recovery in the last week of November.

One reason for this surge in funds was the large-scale intervention by RBI in the forex market, through state-run banks. RBI was on a huge dollar-buying spree in November, helping domestic foreign exchange reserves jump more than $5.5 billion from late October to a record $172.8 billion as on November 24.

Since the beginning of December, surplus liquidity mopped up by the central bank through its reverse repo operations under the liquidity adjustment windows rose to more than Rs 30,000 crore. This was also partly due to the rally in the stock market where the indices scaled a new peak.

Another treasury official pointed out that rates on the inter-bank call market could rise to a maximum level of 6.50-6.75%, whereas it had risen up to 7.20% last month. On Thursday, RBI was able to mop up bids worth only Rs 26,500 crore at the two LAF sessions.

A senior treasury manager said, It has been observed that the last quarter of the fiscal does witness a rise in government spending. Going by the previous years experience, it was seen that FIIs pumped in a phenomenal amount towards end-December. The Centre would be issuing government securities worth Rs 9,000 crore on Friday, wherein the 7.37% 2014 paper would be auctioned to raise up to Rs 5,000 crore and the 8.33% 2036 paper for Rs 4,000 crore.

However, Indian Banks Association (IBA) has ruled out any need for an immediate hike in interest rates, citing that there was no serious crunch of long-term funds or liquidity in the system. There is no serious crunch for long-term requirements. No tinkering of interest rates is required as of now, IBA chairman VP Shetty said on the sidelines of a function.

 
 
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