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RBI seen planning forex intervention
October, 13th 2010

Liquidity has once again turned scarce in the inter-bank money market, forcing RBI to play the role of lender. On Tuesday, banks borrowed as much as `77,935 crore to meet their cash reserve ratio requirement.

Some bankers believe that the central bank is keeping liquidity tight ahead of possible intervention in the foreign exchange market. RBI needs to keep liquidity in a tight leash because once it starts buying dollars, it will release a flood of rupees in the inter-bank market.

Surplus cash has been slowly draining out of the money markets over the past couple of weeks. In the last week of September, the borrowings touched a record high of `89,925 crore on back of advance tax outflows.

If RBI does intervene in the foreign exchange market, then that could also ease the liquidity a bit. We also expect government spending to come in the system, said Bank of Maharashtra treasurer Sanjay Arya.

The liquidity is likely to remain strained as the Coal India IPO opens this month, wherein `18,000-20,000 crore would flow out of the system and until the government pumps it back into the system, the lag would pull the strings on liquidity.

According to Laxmi Vilas Bank treasurer KV Ramesh, banks try to meet their reserve requirements on the first day of the reporting fortnight and this borrowing is reflective of the same exercise. If RBI intervenes in the forex markets, it might ease the pressure. Just a verbal statement by the Governor has managed to keep the rupee stable in the day.

Also, the Coal India IPO would suck rupee out of the system. But foreign investors will be spending dollars, which will again have a reverse effect. But by October end, liquidity should be back into the system.

This month, treasurers do not expect a liquidity surplus. A senior official from IndusInd Bank treasury says: Borrowings may come down as the week progresses. Borrowings might linger around `40,000-70,000 crore in the next two weeks. But a surplus situation is unlikely in this month.

We have G-sec auctions to `44,000 crore this month. And to add to this, the Coal India IPO would sap out around `18,000 crore from the system, and since this money would be going to the government coffers, we will have to wait till it returns to the system, by way of government spending.

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