Borrowing by telecom companies, which have to pay licence fees to the government, has led to a shortage of liquidity forcing banks to hunt for large deposits.
Banks say that by next week lenders may have to seek refinance from the Reserve Bank of India. Reliance on refinance will immediately bump up overnight rates by two percentage points from the prevailing 3.75% to 5.75%, which is the rate at which RBI lends to banks.
On Tuesday, banks invested surplus funds of Rs 8,890 crore with RBI under its reverse repo window — a facility whereby banks can lend surplus funds to RBI. This is a massive decline from the situation on two working days earlier on Friday, when banks had parked surplus funds of Rs 47,500 crore under reverse repo.
Some banks have started withdrawing cash from mutual funds while other have raised money by issuing certificate of deposits. Money market dealers expect liquidity to dry up on account of the Rs 68,000 crore that telecom companies are required to pay against their allotment of spectrum for providing third generation (3G) mobile services. Besides the impact of 3G, dealers say liquidity will tighten in the coming weeks due to advance tax payments that is expected to be in the range of Rs 30,000-40,000 crore.
“We would see tightness in the first week of June where we expect the repo rate to be the operative rates as against reverse repo now. Also, we think that the lender-borrower profile will change that will impact money market,” said Mohan Shenoi, group head, treasury, Kotak Mahindra Bank. This will mean that in June, call money rates, or the rates that banks lend to one another, will hover around repo rate — the rate at which banks borrow from RBI — which is 5.75% now. As of now, call money rates hover around the reserve repo rate— rate that RBI borrows from banks — which is 3.75% now.
According to reports from news agencies, last week banks raised Rs 8,775 crore that includes Rs 2,000 crore raised by Allahabad Bank for three months at 5.50%. Among others, Central Bank of India mopped up Rs 1,600 crore at 5.93% for six months, Dena Bank raised Rs 600 crore at 5.58% for about four months and United Bank of India garnered Rs 600 crore. Some money-market participants say that banks have withdrawn almost 20-25% of their investments from mutual funds. The latest data on the funds parked by banks in mutual fund as on May 7 shows an investment of around Rs 1.9 lakh crore.
Money-market sources say that MFs, too, were aggressively selling certificate of deposits which they held in their books in the secondary market to create liquidity.
Due to the tight liquidity conditions interest rates on CDs shot up on Monday. Vijaya Bank raised Rs 250 crore for one year at 6.52%, slightly higher that one year CD raised by State Bank of Hyderabad last week raised one year at 6.25%.
Interestingly, although liquidity is becoming scarce, demand for government securities have not fallen. Dealers say that this is because banks need to hold government securities, which are offered as securities to RBI for borrowing. Yield on the 10-year paper-7.80 maturing in 2020 closed at 7.40%, down from 7.50% earlier last week.
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