Bank borrowing slips below Rs1 lakh crore. What gives?

Borrowings by banks under the Reserve Bank of India’s daily liquidity adjustment facility (LAF) dropped below Rs1 lakh crore for the first time in two months on Tuesday.

At Rs85,420 crore, the borrowings were around Rs50,000 crore, or 37%, below the daily average of more than Rs135,000 crore logged in the last two months.

The Street, however, views this as a temporary blip and sees demand soaring over Rs1 lakh crore again in the days to come.
“This week, the daily LAF borrowings have come down because this is the second week of the reporting fortnight and also, it is a short working week,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.

Demand for funds is typically higher in the first week of any reporting fortnight as banks prefer to borrow more in the first week in order to avoid last-minute scramble for funds.

As for the short working week, there is a bank holiday on account of Holi on Thursday.

“Come Friday, when the new reporting fortnight covering begins, this should go back to Rs140,000-150,000 crore, or at worse by Monday,” said Suyash Choudhary, head-fixed income, IDFC Mutual Fund.

According to Choudhary, the liquidity situation could, in fact, get worse with the advance tax payment deadline of March 15 drawing closer. He sees the daily-LAF borrowing touching Rs200,000 crore even.

Dwijendra Srivastava, head of fixed income, Sundaram Mutual, however, feels advance tax payments will not affect liquidity right away. “The build-up will begin later this week and continue in the following week,” he said.

Meanwhile, some expect RBI to take liquidity easing measures at its monetary policy review to be held on March 15. On Monday, RBI deputy governor Subir Gokarn said there was space for cash reserve ratio (CRR) cuts.

CRR is the amount of funds banks must maintain with the RBI with reference to their net demand and time liabilities. In the last RBI monetary policy review held in January, the RBI had cut the CRR by 50 basis points to 5.5%, releasing Rs32,000 crore into the system.

One basis point is equivalent to a hundredth of a percentage point.

The expectation of the market is that CRR may be reduced by an additional 50 basis points on March 15.

Gokarn had, however, ruled out any cut in the statutory liquidity ratio (SLR), saying it “won’t create any additional capacity in the system at this point of time, because there is surplus.” SLR, or the amount of liquid assets that a bank must maintain in its reserves, stands at 24% at present.