*A Temporary
Phenomenon<http://www.businessworld.in/index.php/Economy/A-Temporary-Phenomenon.html>
*
There has been an unusual upsurge in liquidity, but it will not last
SRIKANTH SRINIVAS
10 April 2009
[image: Click here for enlarged
view]<javascript:popImage('/images/stories/economy_banking/liquidity-graphic_popup.jpg'
,' ')> *Source: BW research*It feels like there has been a sudden and
surprising cut in banks’ CRR (cash reserve ratio — the cash reserves that
banks are expected to maintain with the Reserve Bank of India). This week,
money markets are flush with more than Rs 40,000 crore in redemptions of
past government borrowings. This includes amounts that had been sequestered
in the market stabilisation scheme (MSS). That is about 2 per cent of CRR.
A couple of other factors that have added to the liquidity transfusion: one
is much higher government expenditure, and more of it coming so early in the
financial year. The second is a consequence of what has been happening in
global financial markets: higher loan repayments from large borrowers.
Will banks finally relent and lend that money to industry? Hold the thought.
That money — large as it is — will be offset through the rest of the month
by about Rs 48,000 crore of fresh government borrowing, a plan that was
announced by the present government as part of its interim budget just ahead
of the announcement of general elections that was made in February.
Bond yields have crashed too: in the 8 April auction of Rs 8,000 crore of
91-day and Rs 1,000 crore of 364-day treasury bills, yields fell to 4.09 per
cent (from 4.50 per cent on 2 April) and 4.40 per cent (the yield on the
182-day treasury bill of 2 April was 4.70 per cent), a level not seen in
several months. But this abundance is not a long-term feature: more
government borrowing will create a dent in it after mid-May or so. But while
the surplus may be absorbed, there is unlikely to be a crunch.
“The RBI has consistently maintained that it will ensure adequacy of
liquidity for the banking system,” points out Indranil Pan, chief economist
at Kotak Mahindra Bank. “There may even be more liquidity if the rupee
depreciates beyond expectations, at which point the central bank is likely
to intervene to stabilise the exchange rate.”
There is more to the current abundance of liquidity than government bond
redemptions (the total amount of liquidity in the financial system is
estimated at almost Rs 1,30,000 crore). Government expenditure has added
another Rs 30,000-35,000 crore to the system. In other words, the advance
taxes collected by the government by 15 March are finding its way back into
the economy. “More of this money will keep coming in until mid-May,” says a
bond market analyst who declined to be identified.
Several borrowers from banks also appear to have repaid their loans at
financial year-end in March 2008 — this happened in the last week of March,
say bank analysts. Data has shown that for the year as a whole, credit
growth has been slower; the trend was evident even at end December 2008, the
latest analysis of the RBI’s weekly statistical supplement has shown.
“The repayments may stem from postponed projects, a desire to show lower
leverage on balance sheets or simply not wanting their credit ratings
downgraded,” says a banking analyst. Over the past few months, there have
been more downgrades of corporate bonds and paper than has been usual.
Are these times of good liquidity likely to last beyond the next few weeks?
Unlikely, says Pan. He is not alone in that assessment. The tide shall soon
ebb, and the liquidity level will fall. Companies will have to work to keep
their heads above the water.
(Businessworld Issue Dated 14-20 April 2009)
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