Cash flows likely to ease on Gov spending, redemptions

Over Rs 65,000 crore is expected to return to the system on account of redemptions

PTI | June 11, 2010



The tight liquidity condition in the system is unlikely to persist beyond the short-term once the government start spending and money from bond redemptions coming in to the system in the approaching weeks.

Over Rs 65,000 crore is expected to return to the system on account of redemptions of government bonds starting next week. These include Rs 10,000 crore G-Sec redemptions next week, nearly Rs 21,000 crore of T-bills on July 2 and Rs 36,000 crore G-Secs towards the end of July.

"Given such a huge cash flow, there should not be any liquidity worries beyond the short-term. Also, there is this Government spending coming in," IDBI Gilts, managing director and CEO, G A Tadas told PTI.

Reflecting the tight liquidity conditions, banks have been borrowing close to Rs 60,000 crore from RBI's repo window at 5.25 per cent in the past few days. But the borrowing level is likely to come down in the days ahead, Tadas said.

Tadas, however, ruled out the possibility of any devolvement in the coming week when Rs 11,000 crore Government bonds are coming up for auction.

Economists, however, are divided on the chances of RBI hiking rates prior to the policy announcement on July 27. Some believe that the high inflation might prompt the apex bank to act mid-next month.

The RBI may hike rates by 0.25 per cent by mid-July as the May inflation data, due on 14th is likely to hover around 9.40 per cent, even as concerns of tight cash conditions are likely to ease by mid-July when Government starts spending, Bank of Baroda Chief Economist, Rupa Rege Nitsure said.

The apex bank increased its short term rates by 0.50 per cent so far this year and the Cash Reserve Ratio (CRR) by one per cent to unwind its accommodative stance.

"Inflation is not coming down structurally and demand for foodgrains is growing substantially. I feel that RBI will have to raise rates by 25 bps even before the policy," Nitsure said.

The tight liquidity scenario in the system, on account of nearly Rs 68,000 crore recent payments by telecom companies and advance tax outgo, is unlikely to persist beyond the short term when the Government start spending, she said.

The central bank is in a dilemma of whether to hike its policy rates or hold them for sometime going forward while simultaneously cushioning the domestic markets from the rippling effect of Euro-zone debt crisis that is feared to have contagion effect in other markets.

On the other side, banks have already indicated that lending rates in the system will move northward on another round of rate hike from the Reserve Bank. "I feel that there will be a rise in the deposit rates, which will be followed by a hike in lending rates rates," Nitsure said.

However, the global uncertainties are likely to result in high volatility in the form of cross-border capital flows in the months ahead and the Rupee is likely to trade in a wide band of 43.50-47.50 the rest of the year, Nitsure said.

Foreign investors have bought USD 4.862 billion worth shares so far in 2010. Recently, Union Finance Minister Pranab Mukherjee had said that capital flows could be adversely impacted if the Eurozone crisis persists.
 

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