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Liquidity surge due to Govt spending, advance tax money
April, 09th 2008
The excess cash in the banking system surged to Rs 79,005 crore on Tuesday, once again giving rise to speculation that the Reserve Bank of India may resort to a hike in cash reserve ratio in order to suck out excess liquidity.

But several bank officials and analysts feel that the surplus liquidity is temporary and steps taken by the RBI, such as the auctions scheduled later this week, will absorb some of the excess money supply.

In the one-day reverse repo auction under the liquidity adjustment facility, the RBI received and accepted 58 bids for Rs 79,005 crore. There were no repo bids.

The inter bank call rate closed at 6.25-6.5 per cent against the previous close of 4.75-5 per cent. Call rates had touched a low of 3.5 per cent during the day. Bond yields too fell by 6 basis points, due to the glut in liquidity.

According to a bond dealer with a private bank, the excess liquidity in the system was due to the advance tax collections returning to the system. Besides, the Government had also started spending, which, too, is reflected in the surplus money supply.

Short-term deposits

Many banks had raised short-term deposits of 15-days maturity in order to shore up their balance sheets before March 31. Part of the excess cash could also be the maturing of these deposits, said a bank official.

Part of the supplies could also be from mutual funds, which are not investing in equities currently due to the volatility. It is possible that the money from mutual funds made its way into the short-term money market in the last two to three days, said another bank official.

But about Rs 20,000 crore will be sucked out of the system this week by way of auctions, said a treasury official with a private bank.

In the CBLO market, there were 576 bids for Rs 47,369.45 crore in the rate range of 1-6.25 per cent.

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