In yet another sign that the liquidity situation in the banking system is improving, the Reserve Bank of India has discontinued the daily second liquidity adjustment facility (LAF) except for reporting Fridays.
Bankers feel banks will take the stopping of the facility in their stride.
“Banks will manage with one LAF. The liquidity situation is improving,” said Arvind Sampath, head of interest-rate trading, Standard Chartered Bank.
“There was no need to extend the second LAF as liquidity has improved. RBI will prefer liquidity in deficit mode rather than surplus because the aim is to contain inflation,” said Suresh Ganapathy, head of financial research team at Macquarie Securities.
Banks have parked Rs 24,695 crore with the RBI under reverse repo in July compared with June’s Rs 15,525 crore.
But, with the discontinuation of the second LAF coming just before the start of a new fortnight, market watchers feel liquidity will be tight in the start of the new fortnight.
“Saturday marks the start of a new fortnight. Banks need more funds at the start of a new fortnight. This may put pressure
on call rates, which may move above the repo rate (5.75%) next week,” said J Moses Harding, head of global markets, IndusInd Bank.
One-day call rates closed at 4.90% Friday compared with Thursday’s close of 4.50%.
At its policy review on Tuesday, the RBI said though liquidity pressures would ease the system was likely to stay in deficit mode “for now”.
On May 26, the Reserve Bank had announced liquidity easing measures under which it allowed commercial banks to avail of additional liquidity support under the LAF to the extent of 0.5% of their net demand and time liabilities or deposits.
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