RBI?s rate hike move drains out Rs 30k cr in ten days

Monday 19, June, 2006 The rate hike by the Reserve Bank of India (RBI) on June 8 has had an immediate impact on liquidity in the system. Liquidity has dipped by almost Rs 30,000 crore in just ten days since the rate hike.

According to the latest figures, surplus liquidity has dropped from around Rs 70,645 crore on June 5, to Rs 40,535 crore on June 16.

Twice a day, RBI conducts Liquidity Adjustment Facility (LAF) operations to stabilise liquidity. It injects or mops up liquidity, according to the prevailing market needs. Of late, the mop-up from both LAF sessions has dipped significantly. In morning sessions, it has declined from Rs 35,550 crore to Rs 23,040 crore, while in the second session, it has fallen from 35,090 crore to Rs 17,495 crore.

It is tough to pinpoint any one factor, say treasury officials. The drop could be partly due to a sharp decline in dollar supply by RBI for funding FII outflows and capital goods imports.

Also, advance tax outflows and banks having to keep cash reserves due to a reporting fortnight, could have hit the availability of funds, they say.

Harihar Krishnamurthy, head-treasury, Development Credit Bank said: ?Advance tax outflows this year have been around Rs 15,000 crore, which is higher than the corresponding figures in the previous fiscal. Also, most oil companies have made huge tax contributions.

By June end, the liquidity scenario is expected to improve, with surplus liquidity reaching a comfort zone of Rs 50,000 crore. However, the government borrowing programme scheduled for next week is likely to pull out some amount of funds from the system.?

He added that a lot of funds could have moved out due to the reporting fortnight. During this period, banks need to manage their cash reserves in such a way that the stipulated ratio is maintained. Banks are known to build up greater reserves, so that liquidity is not hampered when advance tax payments are released. Secondly, the RBI has also supplied large stocks of dollars as FIIs pulled out and imports surged.

With the rupee likely to trade in the 45.75-46.00 band, treasury managers do not foresee any RBI intervention. On June 6, the RBI had issued two dated securities and raised around Rs 10,000 crore.

And with the stock market rebounding, prospects of FIIs re-entering the market have also brightened, which could further ease liquidity conditions.

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