Rupee on a high as RBI curtails liquidity

By siliconindia   |   Thursday, 28 December 2006, 06:00 Hrs
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With Reserve Bank of India taking measures to curtail liquidity, days of easy money for banks seem to be over. The central bank is staying away from infusing rupee by not purchasing dollars in the forex market and letting the local currency strengthen in the bargain, reported The Economic Times.

Further, the government’s decision to decelerate expenditure has slowed down the coming back of advance tax payments into the system. Rates have gone through the roof in the call money market as a result; it touched a six-year high of 12.5 percent on Thursday. In the last 15 days, the cost of overnight money has almost doubled from 6-6.10 percent to 11.5-12 percent. The rupee has gained more than 25 paise during the same period.

The central bank, in a breakaway from its traditional stance, has decided not to support the currency. Generally, the buying of dollars would have had the collateral impact of infusing rupee funds into the system. Surplus liquidity in the system has almost dried down with RBI infusing funds through the liquidity adjustment facility (LAF), noted the ET.

Three main factors, believe treasury officials and bankers accessed by the publication, have contributed to this trend. The first: tranche of the hike in the cash reserve ratio (CRR) impounded around Rs 6,500 crore from the system. Secondly, advance tax outflows between December 15 and 18 estimated at around Rs 25,000 crore, are believed to be parked with the central bank by the government. These funds normally come back to the system.

Third, as on December 15, surplus revenue parked with the government, which is generally maintained at a minimum balance of Rs 100 crore, has touched Rs 22,716 crore. Many banks spanning state-owned, private and multinational players were said to be short of their portfolio of bonds eligible for classification under statutory liquidity ratio. This makes it difficult for them to tap the LAF window, which requires banks to borrow funds from RBI by parking their bonds with the central bank. Large public sector banks like SBI, Bank of Baroda and Canara Bank were seen lending money in the call market at significantly higher than the repo rates (7.25percent) through which banks borrow from RBI.

“Trading volumes in the foreign exchange market are extremely thin, especially because the year-end is nearing. Intervention from the central bank has not happened in a sustained manner,” noted RVS Sridhar, vice-president, treasury, UTI Bank.

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