A clutch of banks in both public and private sector have sought deferral of the Reserve Bank of India’s exit from quantitative expansion on mounting liquidity concerns.
High-level public sector bank officials said that continuing with the exit as road-mapped by the RBI would lead to further squeezing liquidity in the banking system. Most banks were opposed to hikes in the cash reserve ratio. The CRR is the zero interest balance that banks are expected to maintain with the RBI against their net demand and time liabilities. The ratio was hiked last on April 20 and is now at 6 per cent, though way off the decade’s peak of 9 per cent.
Credit Offtake
Bankers said that a 0.25 per cent hike in the CRR would result in impounding at least Rs 12,000 crore from the banking system.
Any hike, bankers said, would result in a pass-through impact in the form of higher interest costs for borrowers. However, the dilemma before mostbanks was that credit offtake remains depressed.
Euro Concerns
Credit offtake for the current fiscal so far was a negative Rs 17,017 crore, which translated into an incremental credit deposit ratio of minus 44per cent. A hike would, therefore, further impact offtake.
Banks were also intensely worried about developments in the Euro zone. This was because substantial numbers of exporters are Europe dependent. About 28per cent of export trade is invoiced in euro.
It is feared that insolvencies in Europe would translate into asset stress for domestic banks — especially in the case of the textile and engineering component export sectors.
Flight of Capital
Further, the liquidity impact is partly on account of the flight of risk-averse foreign non-debt capital as foreign institutional investors purchased dollars to move back into safe haven of dollar Treasuries.
The capital flight also coincided with the drawdown by telecom bidders of Rs 67,000 crore from the banking system for complying with the payment deadline in June.
The tight liquidity situation was further compounded by advance tax outflows from corporates. Signs of the tightening were evident from the two-day liquidity adjustment facility auctions where recourse to the RBI’s reverse repurchase was just Rs 5,850 crore, a sharp drop from last weekend’s Rs 47,530 crore.
Rising Yields
Besides, bankers also said that CRR hikes or Reverse Repo/Repo hike at this juncture would translate into yield spikes that could directly impact the Government’s borrowing programme for the current year. Such spikes became apparent at the Wednesday’s Treasury bill auctions where the cut-off yield on the 91- day bill was 5.04 breaching the 5per cent mark for the first time since 2009. This was 7 basis points more than the 182-day T-bill cut-off yield.
Although the RBI had reinstated some support measures through a second liquidity adjustment facility auction, bankers said that the tightening was likely to leave its impact on the Rs 12,000 crore Government security auctions on Friday.
With the beginning of the Euro zone crisis, the average bid-to-cover ratios at the auctions have steadily dropped. This ratio measures the interest in treasury/gilt auctions.
At the May 14 auctions, the average bid- to-cover ratios were 2.58 times the notified amount. At the May 21 auctions, the ratio was down to 2.08 times.
